Keep in mind that this article is not financial advice or a recommendation to invest. You should consider advice if you’re not sure. All investments, and any income they produce, go up and down in value over time. This means that you may not get back what you put in.
How long have you been in sustainable investing?
Ever since I started at Triodos Investment Management (‘Triodos IM’) back in 2001. I read a report called ‘the profit of value’ which talked about Triodos as a values-driven organisation and I was inspired. It was back before the days of the internet, so I picked up the phone and asked for a job. I was lucky enough to be offered one and I’ve never looked back. I immediately fell in love and am completely devoted to Triodos – as you’d expect after 22 years of service.
After having worked on a project for six months, I became Head of Research, where I was responsible for developing and applying our sustainable investment criteria, managing the list of organisations we could invest in, and engaging with these organisations from an impact perspective. I joined the portfolio management team in 2017, meaning I construct discretionary portfolios for organisations and charities which want to invest in line with our mission.
In January this year, I also took over management of the Triodos Sterling Bond Impact Fund. I’ve been involved with it since its inception and was very happy to take on the daily management of the fund. I enjoy applying my passion for impact investing, along with my expertise, to maximise the positive impact.
Has Triodos’ investment approach changed in that time?
We’ve always had very strict minimum standards outlining the kinds of organisations we didn’t want to finance. Our main change over the years has been in our approach to positive impact. It’s not enough to simply screen out organisations that are causing harm, we’ve shifted towards seeking out companies that are tangibly benefitting nature and society.
This shift came because the old approach of choosing the “best in class” simply wasn’t good enough. Choosing a company that’s better than its peers in terms of sustainability can be like choosing the best of a mediocre bunch. For example, many “best in class” retail companies are high-street fashion brands that promote fast fashion. They might be doing better than their peers in terms of human rights and using organic material, but fast fashion simply isn’t sustainable.
What makes Triodos’ investment strategy different?
Our stringent investment approach means we’ve got around 300 companies that meet our minimum standards and transition themes. That’s a fairly small pool, but this allows us to carefully monitor and to actively engage with the companies we invest in and make an even greater impact.
When we choose to invest in a company, it’s because we agree with what it’s trying to achieve. That means we’re in it for the long-term and try to guide the organisations to do better where we can. Having a consistent and concentrated portfolio allows us to maintain a special relationship with the organisations we invest in. We speak to them once a year or more to check in on sustainability issues and ask important questions.
We’re often ahead of the curve on sustainability issues, and raise potential risks before the company is even aware of it. For example, we were raising issue of conflict minerals many years before it became well-known. We have to be experts in a range of industries and products, from wind turbines to telecommunications, but are usually on the forefront of these issues, honing and sharing best practices.
What’s the aim of the Sterling Bond Fund and what does it invest in?
The Sterling Bond Impact Fund aims to generate positive impact and a fixed rate of return by investing in bonds issued by sustainable companies, and in green and social bonds where the money raised will have a positive impact.
The Sterling Bond Impact Fund was introduced because we wanted UK investors to have access to a wider range of investment funds. Bonds are investments that represent a loan made that is paid back to the investor and are generally lower risk than shares. The Sterling Bond fund is therefore lower risk than the other funds offered by Triodos Bank UK. That being said, all investments carry risk which means that investors could get back less than they put in. Even though they aim to produce fixed income, there’s no guarantee. The value of investments, and any income they may produce, may fluctuate.
We also decided to offer this fund in pounds sterling so investors can have a positive impact in the UK market without any currency fluctuations. Other funds we offer are denominated in Euros, so currency movements can affect the value of the investment. Having a sterling bond fund means this doesn’t happen, and the yield reflects the UK bond market and currency.
The fund also invests in bonds issued by the UK government known as gilts or ‘sovereign bonds’. This is important from a portfolio management perspective to ensure there’s enough liquidity in the fund, and to balance interest rate risk and credit risk. As we do not think that investments in gilts generate positive impact we try to limit the exposure to these bonds. Currently, the exposure is less than 20% of the portfolio.
Transparency is of monumental importance to Triodos, so you can see exactly where the fund is invested on our Sterling Bond Look Through webpage.
Can you tell us a little bit more about the performance of the Sterling Bond fund?
The fund had a difficult start as it was launched at the end of 2020, which was the start of rising interest rates due to the economic uncertainty around the pandemic followed by the war in Ukraine in 2021. These events triggered higher prices, inflation and interest rates.
These fast-rising interest rates created a big problem for bond markets as they lower the value of outstanding bonds.
Central banks including the BoE have raised their policy rates to slow down the economy so that inflation will go down. Although inflation is still elevated, there are signs that the economy is cooling off and that the end of the rate hike cycle is near. This means the worst is behind us. Results from the first quarter of 2023 were positive again now that inflation and growth expectations are going down. Whilst a lower growth forecast may sound negative, it’s actually beneficial for bonds. Lower growth means lower interest rates, which could mean a better performance and value for bonds.
Remember though, no one has a crystal ball. We don’t know what will happen in the future and investors should make their decisions based on their own financial situation. Think about whether a particular investment aligns with your goals, risk tolerance – and, of course, your principles.
What’s your message to investors in the Sterling Bond Fund?
Whilst the bond market has had a turbulent time, last year was unprecedented and not a clear reference point. Looking at interest rates and yields, bond funds are becoming a viable investment alternative. However, they won’t be right for everyone, and investors will need to make their own decisions about what’s right for them.
Bonds sit in between cash and equities (like shares) in terms of risk. The Sterling Bond Fund in particular looks for high quality bonds with less risk. They aim to generate a stable income as the company issuing the bond pays back the debt, although this is not guaranteed. That means it could generate better returns than cash simply sat in a bank account.
The positive impact you can have by investing in bonds has improved over the years. This is related to the introduction of use-of proceeds-bonds. These bonds have a clear green or social focus and are transparent about what the proceeds of the bond are used for. My message to investors is that this fund offers a great opportunity to generate positive impact whilst achieving a decent return. But, as always, this is not advice, so make sure you learn about the fund so you can decide whether it’s right for you.