This article first appeared in the October 2024 issue of the GreenMoney Journal and is reprinted here with permission. Learn more at greenmoney.com.
This year marks the 30th anniversary of the Praxis Impact Bond Fund, which gives faith-based and other investors access to a broadly diversified core bond portfolio with a focus on green, social and other types of impact bonds.
Over the years, the fund’s appeal has broadened from faith-based investors to include sustainability and social-impact focused investors. Its assets have grown from $11 million in 1994 at the fund’s inception to nearly $1 billion today.
Over time, as more impact-oriented bonds have come to market, Praxis has increased their allocation to 36% in the Praxis Impact Bond Fund. We spoke about what’s made that possible with Benjamin Bailey, CFA, Vice President of Investments and Senior Fixed Income Investment Manager for Praxis Mutual Funds.
What’s the history of the Fund?
Benjamin Bailey: Originally called the Praxis Intermediate Income Fund, the Praxis Impact Bond Fund launched in 1994 to give Mennonite and Anabaptist investors a way to invest in bonds consistent with their values. Praxis brought retail investors an approach to fixed income investing that religious institutions in these faith traditions had utilized for decades.
I joined the fund’s portfolio management team in the early 2000s at the start of my investing career. In those years, we screened out issuers that didn’t meet our specific values criteria—so we were avoiding “the bad”—but we hadn’t yet envisioned a way in which we could really make a deep, positive impact in the world.
A watershed moment came in 2006 when we invested in the International Finance Facility for Immunization (IFFIm). Learning about this opportunity in vaccine bonds opened my eyes to the specific impact that investing in positive impact bonds can have in a fixed income portfolio.
The introduction of green bonds in the U.S. in 2009 and subsequent growth of the impact bond market have allowed Praxis to ramp up the percentage of the portfolio that is dedicated to positive impact bonds. By 2016, that percentage had grown to nearly a quarter. That’s when we changed the name to the Praxis Impact Bond Fund, wanting to make clear that our focus was on making a positive impact through this fund, to the degree the market made it possible. Today, the percentage of impact bonds is even higher – about 36%. And we look forward to growing this percentage even further.
How does Praxis define “Positive Impact Bonds”?
Bailey: Positive impact bonds are bonds that make a specific positive impact to the climate and/or communities. A specific part of this market is in bonds called green bonds, social bonds and sustainability bonds. These have generally accepted guidelines from the International Capital Market Association on what projects are acceptable in each of these categories and establish general expectations for future reporting and signoffs from management and auditors.
As investors, we want the bonds to have a level of rigor and depth to them in terms of impact, but we also don’t want to discourage potential issuers with too many firm regulations and rules.
As committed impact bond investors, we often engage the issuers, encouraging them to take this opportunity seriously and pursue the highest standards that are feasible.
How has the positive impact bond market changed over the past few years?
Bailey: The market went through a large period of growth, with consistent issuance increases year after year for over a decade. According to Bloomberg, the broader impact bond market went from an issuance of about $600 billion in 2020 to nearly $1.2 trillion in 2021, with 2022 and 2023 remaining at similar levels. There is still strong growth this year. According to Bloomberg, there has been $700 billion of green, social, sustainability, and sustainability-linked corporate and government bond issuance this year as of Aug. 23, 2024, up 9.5% from the same period last year. But the vast majority of that growth is in international markets. There hasn’t been strong growth in the U.S. dollar domestic market. Specifically in 2023, U.S. dollar-denominated ESG bonds issuance was down 49% from 2022, and the 2024 issuance of these bonds has continued to be slow.
How do you go about ensuring diversification and how important is it in a fund like yours?
Bailey: We want investors to be able to utilize this fund as part of their core fixed income allocation and not view this investment as a niche part of their portfolio or as a form of charity.
To achieve that, we aim to generate performance similar to the Bloomberg Aggregate Bond Index – a common benchmark for core bond funds – over market cycles, while maximizing our ability to have a positive impact in the world we share.
While it might be great to say in the short term that a fund has “100% positive impact bonds,” in the long term, I don’t feel that fund would be appropriately benchmarked to a broad fixed income index. This would fail our understanding of our fiduciary duty to our shareholders.
Most people don’t want to sacrifice returns that could impact their retirement in a large portion of their fixed income allocation. We believe people shouldn’t have to make that choice. Most faith-based and sustainable investors are looking for a mix of solid, long-term performance, proper diversification and an ability to make a real impact through their investments.
How has investor interest/investor makeup changed over the years?
Bailey: Over the years, we’ve increasingly attracted faith-based, SRI and sustainable investors, especially as the green, social and sustainability bond space has grown in visibility. In addition, the fund is included in many sustainable and values-based models for advisors, across different platforms, which has been important to asset growth. Just over a decade ago the fund had $350 million in assets under management and now we hold just under $1 billion.
In a social climate fraught with division, Praxis is grateful to attract investors with a wide range of convictions. Some of our investors may be motivated by traditional values that emphasize personal morality while others prefer more progressive engagement of systemic social and environmental challenges. However, all these investors want to be productive stewards of the resources entrusted to their care.
How can investors know that their investments are making a difference?
Bailey: There are many ways to make a difference with your financial resources – through charity or purposeful purchasing, for instance – but investing with your values in mind allows you to use the power of your investment portfolio to promote a better world. It is important to consider the full range of impact opportunities available, including positive impact bonds. Our annual Praxis Real Impact Report and Real Impact Quarterlies document seven different impact strategies, available across a range of fund types, that can help investors understand the impact of their investment dollars.