We hope that this article helps you learn more about bonds and whether they may be right for you. But keep in mind that this article is not financial advice, a personal recommendation, or a guarantee of what will happen in the future. You should consider advice if you’re not sure whether an investment is right for you.

A quick recap on bonds

Bonds are different from shares, as they represent a loan made to an organisation. They typically pay a fixed rate of interest on the loan over a set period, meaning the investor gets a fixed level of income over the term of the loan. At the end of the term, the initial amount borrowed is repaid to the investor.

Bonds can be less risky than shares as organisations prioritise paying back debt over paying out profits to shareholders. Even if a company is not making any profit, as long as the company can service its debts, the bondholder will get their money back.

Bonds can also be sold to other investors at any time, and the value of the bond will vary due to factors such as the financial strength of the issuer and what’s happening to interest rates. So it’s important to remember that like all investments, the value of bonds and the returns they provide can go up and down over time, so investors could get back less than they put in.

The Triodos Sterling Bond Impact Fund invests in corporate, green and social bonds, as well as bonds issued by the UK government (also known as gilts). It takes a cautious approach, aiming to generate a positive impact on society and the environment, whilst also providing a good level of income for investors.

Why might now be a good time to consider bonds?

Over the last year, we’ve seen a significant shift in bond markets. This was due to the rise in the Bank of England base rate from 0.25% up to its current rate of 5.25%. This was in response to sharply rising inflation (the rate in which prices rise), as raising interest rates is a key policy tool to help reduce the level of inflation.

This sharp rise in interest rates has made the fixed income on offer from many existing bonds look less attractive compared to returns available on cash, and as a result, their valuations have fallen sharply. However, if you believe we are now at a turning point in the interest rate cycle it could be a good time to look more closely at bonds, as falling interest rates can often result in increasing bond valuations.

Whilst the fall in bond values has been painful for existing bond investors, this significant fall in bond prices could be a good opportunity for those looking to invest in bonds now. For example, at the start of 2022, investing in a 10-year UK gilt (government bond) and holding it to maturity offered a yield of 1%, whereas it offered a yield of 4.3% around mid-November 2023.

We expect that the Bank of England will keep the interest rates at current levels for some time as the UK economy is currently facing ‘stagflation’ (a combination of high inflation and weak economic growth). After that, we expect a recession in the UK, which would ease inflationary pressures. Whilst a lower growth forecast may sound negative for the economy, it is actually beneficial for bonds. Lower growth means the Bank of England is more likely to lower interest rates, which will make returns from bonds look relatively more attractive.

Why might someone consider investing in the Triodos Impact Sterling Bond Fund?

3D investing square mile logo silver award. Do good, avoid harm, lead change
The Sterling Bond Fund has received a Silver 3D investment rating

Besides a potential financial return, the Triodos Impact Sterling Bond Fund aims to generate

positive impact. It does this by investing in bonds that are issued by organisations that are making a positive contribution to a more sustainable and inclusive future. To see all the organisations that this fund supports, visit the visit the fund's 'look through' webpage.

The fund also invests in ‘use-of-proceeds bonds’ where the proceeds of the bond are earmarked to finance eligible environmental and social projects. Use-of-proceeds-bonds are a strong instrument to steer the investments towards more positive impact.

As a result, the fund has a much lower greenhouse gas and water consumption footprint than the benchmark. It also contributes positively to the Sustainable Development Goals developed by the United Nations.  

Can you tell us about some of the projects this fund has helped support?

A good example is a green bond issued by Severn Trent. The proceeds are used to invest mainly in water and wastewater management, renewable energy and energy efficiency. The company plays a pivotal role in ensuring that people have access to good quality and affordable water, and are working hard to address criticism on the industry-wide issue of discharge over the past year. The proceeds of the bond help to achieve this goal and contribute to the renewable energy transition.  

Another example is a regular bond issued by the German company, Rentenbank. This is a refinancing institution that provides special promotional loans to borrowers via local banks. The financial activities are geared towards businesses in agriculture, horticulture and forestry with the aim to facilitate healthy and high-quality food as well as improving environmental and consumer protection and animal welfare.