Bond Investing with a Conscience: Socially Responsible Bonds - dummies

Bond Investing with a Conscience: Socially Responsible Bonds

By Russell Wild

Socially responsible investing (SRI) can mean different things to different people, but for most, the goal of SRI is to shun bad-thinking-and-doing companies and embrace good-thinking-and-doing companies. Typically, companies that produce tobacco and alcohol, engage in gambling activities, produce lethal weapons, pollute the environment, discriminate in employment, or violate human rights are shunned. Companies that are helping to create a safer, cleaner, healthier, and more just world are embraced.

Most SRI investing is done through stock mutual funds. Steve Schueth, president of First Affirmative Financial Network, a Colorado-based independent advisory firm specializing in SRI, finds that somewhat ironic. “Doing social action from the debt [bond], as opposed to the equity [stock] side of the portfolio is potentially much more powerful,” he says.

Schueth points out that most stock transactions occur on the secondary market. After the initial public offering of stock by a company, people generally don’t buy stock directly from the firm but rather from a third party through an impersonal exchange. Not so with bonds. Bonds are much more often purchased directly from the issuer.

“As a lender of money, you actually have considerable power to affect a company’s actions,” says Schueth. Of course, he admits, only really big lenders have really big power. For the rest of us, a handful of SRI bond mutual funds allow us to exert our influence in communal fashion.

What are socially responsible bonds?

Socially responsible mutual bond funds put companies through a social screen. Only those companies that act in accordance with the social guidelines of the fund managers get to sell their bonds to the fund. Examples of SRI bond funds include the following:

All three of these funds use somewhat similar social criteria. From the people at Pax World:

Pax World offers mutual funds dedicated to promoting peace, protecting the environment, advancing equality, and fostering sustainable development. We seek to invest in companies that meet positive standards of corporate responsibility and that provide products or services that improve the quality of life.

The somewhat similar Calvert and Domini funds consist of mostly higher quality, intermediate-term bonds. The Pax fund, as the name implies, includes bonds of lesser quality but potentially fatter returns.

Should you invest in socially responsible bonds?

None of these funds is terrible; none (from a strictly financial viewpoint) are great. But some things in life matter more than money. If your values jibe with those of the managers of these funds, then you should consider these funds, carefully, for the fixed-income side of your portfolio. You could do a lot worse.

Bonds with big hearts

Calvert Foundation Community Investment Notes are sort of like any other individual bonds in the sense that they have a maturity date, pay a steady rate of interest, and can be purchased through many brokers. But the similarity ends there.

You select the term — between one and ten years — and you select the interest rate (up to a modest limit). The money you lend goes to fund affordable housing, make small business loans to people who otherwise couldn’t get them, and build community facilities that provide healthcare and education to the underserved.

The Calvert Foundation began the project 15 years ago, no investor has yet to lose a dime, and the loans have undoubtedly helped to alleviate poverty worldwide. The notes are available to U.S. residents of all states, with the exceptions of Arkansas, Pennsylvania, South Carolina, and Washington (subject to change).

The sliding rate scale (the less you earn, the more altruistic your investment), purchase instructions, and more information on the various anti-poverty projects funded by the foundation can be found on the Calvert Foundation website or by dialing 800-248-0337.

For accredited investors (generally speaking, those with more than $1 million in net worth, not including the home) willing to sink in at least $25,000, somewhat similar, low-risk, low-interest loans to help combat poverty can be made through Root Capital (617-661-5792).