There are two main investment types available to most investors- stocks and bonds. Stocks are a form of ownership in a company, so if you own a stock share it means you gain when the business is successful. Bonds are a little different. Bond are loans made to either municipalities, banks or corporations in exchange for interest payments. If you own a bond issued by a company you won’t necessarily gain anything different if that company grows. But, in turn, you get a little more security because you’re higher on the hierarchy of people who will get paid back if the company defaults. And instead of sharing in the growth of a company as is done with stock ownership, bonds pay a steady income made up of interest in addition to repaying your principal back. Think of it like your car loan. If you had a great income year with lots of bonuses you wouldn’t offer to pay your bank more than the interest rate they’re charging you, right? Well, that’s how a bond works.
In the world of Socially Responsible Investments there is far more variety of stock investments available than there are bonds. So if you’re specifically concerned with investing for a specific cause, say Social Justice, your options are currently quite limited. Regardless, there are close to a handful of bond types that I think could be considered as Social Justice oriented.
I have often offered municipal bonds as a Socially Conscious investment choice for years now, even though they may not have been categorized as such. Why? Because it’s a way to lend money to municipalities for projects like parks, libraries, bridges and roads to be made and maintained.
A more recent development in municipal bonds (AKA munis) are Social Bonds. Social Bonds can be any type of bond, really, just as long as the proceeds being raised are exclusively applied to finance or refinance new and/or existing eligible Social Projects. 1 In the world of munis, this could mean bonds issued for projects such as clean drinking water, clean transportation; essential service access such as health care and education; socioeconomic advancement and empowerment; and affordable housing projects.2
I do not personally like to help clients buy individual bonds in the market. I am a Financial Planner first and an investment manager as a close second. As in, I cannot focus my time on long-term goal achievement when I’m spending time analyzing each and every individual bond or stock available on the market. I leave that work to skilled money managers. As mentioned above, there are many reasons you can look at a muni as an SRI (Socially Responsible Investment) but not all are explicitly labeled as social, which makes them more difficult to identify. That’s one of the reasons why I look for a managed account with an ESG research framework built-in when I want to fulfill a need for Social Bonds, that way I don’t have to make any judgement calls.
There are other bond mutual funds that could be seen as Social Justice investments. One I often use to fill this space is focused on supporting community development, servicing low-to-moderate income individuals and affordable housing. Another I’ve used invests in CRA Qualified bonds under the Community Reinvestment Act (CRA) of 1977. The CRA was passed to reverse the frequent tendencies of urban areas to redline, which is where the federal government and banks actively discourage and therefore avoid making loans to lower-income and minority neighborhoods. This Act was made to reinforce existing laws that required banks to sufficiently address all members of their community and their banking needs.3 Among other themes, this particular CRA-focused offering includes affordable health and rehab care, affordable housing, education and childcare, enterprise development and jobs, healthy communities, minority advancement, neighborhood revitalization, seniors, the disabled and transit-oriented development.
In general, bond ownership can be seen as less risky than stock ownership, which might make it either appealing or less appealing to you from the start. But it’s important to recognize there are other ways to invest in Social Justice other than just investing in a company’s stock. Bonds are an excellent diversifier to most portfolios and it’s important to note that you can narrow their focus just as much as you can with stock ownership. So maybe there’s room for a bond fund or two in your portfolio, after all!
1 Sustainalytics. Social Bonds- Sustainable Finance Solutions. www.Sustainalytics.com. 24 November 2020.
2 Kashmanian, Lauren. Muni Investors Can Prioritize the “S” in ESG with Social Bonds. www.Calvert.com. 24 November 2020.
3 Community Reinvestment Act 1977. Investopedia. 24 November 2020.