Why is this fund on our Foundation Fundlist?

One established fund option in this area is Rathbone Ethical Bond Fund, managed since 2004 by Bryn Jones. He aims to build a portfolio of good quality investment grade bonds (avoiding the riskiest ‘high yield’ bonds) while applying a broad range of both positive and negative social, environmental and governance(ESG) screening criteria that could appeal to those with ethical concerns. The investment process centres on the team’s ‘four C’s plus’ model, which filters ideas to be considered further. The four Cs are: Character, which assesses management integrity and the likelihood of bonds being repaid; Capacity, the availability of cash‐flows and assets to repay obligations; Collateral, examining assets offered as security; and Covenants, the terms that affect the lending agreement and any restrictions on the bond. The plus signifies Conviction, which sums up the view that long term above average performance means thinking differently to the market through a contrarian stance or a sceptical evaluation of orthodox thinking. The resulting list of potential investments is researched by Rathbone Greenbank (a specialist ethical investment unit of Rathbone Investment Management) who applies a mixture of negative and positive criteria to reduce the number of available investments. Companies and institutions not passing the negative screening criteria are automatically excluded. These are: alcohol production, animal testing, armaments, environmentally unsustainable or high-impact activities, gambling, nuclear power, pornography and tobacco. Companies are also screened for demonstrating progressive or well-developed practices or policies in corporate community investment, employment, human rights, management of environmental impacts and the provision of beneficial products and services. Large parts of the bond market are made up of government bonds, which some ethically-minded investors would rather avoid, and it is worth noting that this fund does not use UK gilts or US Treasuries. Instead ‘supranational’ bonds such as those of the European Investment Bank take their place. As well as screening out companies based on their areas of activity, research is also conducted on a thematic basis through such topics as climate change, clean energy, human rights, community investment and employee welfare. While the bulk of the portfolio is invested in the bonds of multinational companies considered to meet the various ethical criteria, there are a number of charity and green bonds included in areas such as social housing, sustainable transport, renewable power and environmental initiatives. The fund’s longer term performance has been strong, particularly when judged on a risk adjusted basis, although past performance is not a guide to the future. Mr Jones partly attributes the strong returns to the responsible nature of the companies the fund lends to, which helps cement their longevity and ability to repay their bonds.