What are the potential risks and returns associated with ethical bonds?
Bryn Jones, manager of Rathbone Ethical Bond fund, explains the potential risks and returns associated with ethical bonds and how the Rathbone Ethical Bond meditates those risks. We cover the inherent risks involved in the ethical bond sector, including regulatory changes, and how they differ from traditional bond investments. Moreover, we explore the potential returns that can be achieved through ethical bonds and the financial benefits that arise from supporting projects in sustainable areas such as renewable energy, climate adaptation and more.
Watch an in-depth interview with Bryn on the current opportunities in ethical bonds
View the transcript
I’ll break this down into two parts, really. One is our investment process [which] very much looks at risk adjusted returns. So, part of our valuation work is to find the assets with the best yield or high spread with the lowest levels of volatility. And that’s part of our technical work that we do when we’re picking an asset. But that’s more to do with our fund management style.
In terms of the risk return from sustainable investments, arguably, particularly in the bond market where long-term returns have to be sustainable, our upside is our yield and if you’re a really clever fund manager, you can add a little bit on top of that. And your downside is a hundred percent. So, really, what we’re trying to avoid, is to avoid the blow-ups. And if you think about some of the big issues that have occurred through recent modern history, a lot of those blow-ups have come from businesses that aren’t sustainable.
We saw BP, we saw VW issues, we’ve seen Credit Suisse more recently. You go back to the banking crisis, there were particular banks that were taking risks that shouldn’t have been taking risks. You go through businesses like Parmalat S.p.A., WorldCom, some businesses that were excluded purely on governance grounds, which have done really poorly. So arguably, again, you know, you could say that if you have a sustainable investment, you are protecting your investors from that potential big, large drawdowns that you get from assets that are not properly managed. So I would argue that, and that [also] goes [for] our peers as well that manage money in the ethical and sustainable space that are able to generate good risk-adjusted returns on a long-term basis. And of course, the sharpe ratios are really valid over 5 and 10 years. And they’d argue, if you look at those funds, they’re probably generating good sharpe ratios like ourselves.
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