Positive Impact Bonds Build on Strong Foundations

By Benjamin Bailey, CFA, Praxis Mutual Funds & Everence Financial


Praxis Mutual Funds logoPraxis Mutual Fund shareholders expect us to invest with their values in mind. The Praxis Impact Bond Fund turned 25 this year and through the first half of the fund’s tenure we diligently focused on screening out holdings contrary to those shared values. In 2006, our eyes were opened by a public bond offering that showed us what positive impact bonds (those bonds that make a positive impact on the climate and/or communities) could do.

In November of that year, the International Finance Facility for Immunization (IFFIm) issued their inaugural “Vaccine Bond.” This bond raised $1 billion to help immunize children in developing countries. It accelerated the ability for six European nations to use their stellar credit rating to help save lives. An independent evaluation of the program in June 2011 calculated that over 2 million future deaths had been averted because of the IFFIm program.

For years the Praxis Impact Bond Fund had excluded “unaligned” issuers and invested nearly 1 percent of the fund in Community Development Investments. But with the advent of impact bonds, the opportunity to purchase bonds that promoted our core values while earning a market rate return was exactly what our investors desired before they knew it was possible.

The market for positive impact bonds paused for several years during the Great Recession, but, by the end of 2009, the International Bank for Reconstruction and Development (part of the World Bank) issued its first green bond in U.S. Dollars. This was another important step forward in developing a symbiotic market where issuers grew funding for the environmentally focused aspects of their business while generating products for a willing group of investors wanting to make a real-world impact.

Over the next decade, issuance of green, social and sustainability bonds exploded. According to the Climate Bond Initiative there has been about $190 billion in green bond issuance globally year to date through mid-October 2019. This already surpasses the $171 billion and $156 billion issued in 2018 and 2017, respectively.

This phenomenon extends beyond environmentally-focused initiatives. According to Bloomberg there has already been $49 billion in sustainability and social bonds issued in 2019, which is on pace to double the $29 billion issued in 2018.

We expect these markets to continue to grow in the hundreds of billions of dollars each year because both issuers and investors want to make an impact on the world that we share. According to Bloomberg there is over $600 billion in sustainable debt (green, social and sustainability) outstanding at this time. However, it still pales in comparison to the $102.8 trillion of global bonds outstanding according to SIFMA in 2018.

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Some say that specific rules and regulations should be established to discourage greenwashing (environmental impact in name only). But we believe the Green Bond Principles, the Social Bond Principles, the Sustainability Bond Guidelines, and market forces, not regulations, will sort this out.

The Green Bond Principles recommends external reviews of new bond issues. Several organizations have been analyzing and rating impact bonds issuing what is commonly known as a Second Party Opinion. As an example, green bonds issued by FNMA (Fannie Mae) are rated “light green” by CICERO (Center for International Climate Research). This rating suggests that Fannie’s bonds are a first step to a low carbon future, but they still include fossil fuel use. Some investors believe “light green” issues dilute the green label, but we believe more issuance, even if only partially addressing environmental and social challenges of our society, is better than less.

Our industry is also subject to hindsight bias with respect to the first green bonds issued. Looking back from our current vantage point, the earliest green bonds weren’t as impactful as ones that are issued today. But we believe those issuers needed to step up, so the next ones could stand on their shoulders. In the same way, worrying whether the next green bond has the perfect profile is not productive. There are no perfect issuers and no perfect bonds, but we dare not let perfect be the enemy of the good. We can be honest about the history of this market without being dismissive of what has been accomplished.

Robert Watson-Watt was a Scottish physicist credited with the development of radar. He justified his choice of a nonoptimal frequency in his radar construction because of the “cult of the imperfect.” He said, “Give them the third best to go on with; the second best comes too late, the best never comes.”

Watson-Watt’s perspective fits the impact bond market well. We simply can’t wait for the perfect green bond that receives two strong second opinions and the issuer that must receive perfect scores from all the ESG rating agencies. What we really need is change that is both flexible and fast and a market that generates the full spectrum of investments—from light green to dark green.

Ideally, this market must eventually be in the trillions of dollars. If the market raises $1 trillion a year in green bonds and we later find out that $10 billion was “light brown” instead of “light green”, then that is far better than having only $50 billion in perfect dark green bonds.

The market—and those who watch it so closely—will punish the issuers and their investment banks that bring bonds that fail to engage in this effort with integrity. However, we also need the market to reward those who bring innovative, needed change and progress even if their issuance is not perfect. The future of our planet and our communities demands the participation of the many, not just the perfect or the pure.

These are exciting times for investors to invest with their values and make a positive impact in the world. Everything in life is a balance and we don’t want grossly over-promised and under-delivered impact bonds, but we also know that we can’t wait around because “the best never comes”.


Article by Benjamin Bailey, Vice President of Investments and a Senior Fixed Income Investment Manager for Praxis Mutual Funds® and Everence® Financial, a leading provider of faith-based financial products in the United States and a ministry of Mennonite Church USA. He is a member of the organization’s investment management committee and has more than 15 years of experience in fixed-income investing. He has served as co-portfolio manager for the Praxis Impact Bond Fund since 2005 and co-portfolio manager of the Praxis Genesis Portfolios since June 2013. He also acts as co-portfolio manager on internal insurance portfolios and externally managed client accounts.

Cited in The Wall Street Journal, Money, The Banker and the Associated Press, Benjamin has spoken on Green Bonds and investing for a low-carbon economy at the US SIF Annual Conference, the SRI Conference and other national venues. In 2014, he was named a NextGen Bond Manager to watch by, highlighting a handful of managers younger than 45 who are quietly outperforming many of their peers.

Benjamin joined Everence in 2000, assisting portfolio managers as a socially responsible investing research analyst. A graduate of Huntington (Ind.) University, he earned the Chartered Financial Analyst® designation in 2003 and has served as president of the Investment Section for the American Fraternal Alliance. Benjamin often serves as a resource to regional and national organizations and events on positive investing in the bond market.


Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates.

The Fund’s stewardship investing strategy could cause the fund to sell or avoid securities that may subsequently perform well, and the application of social screens may cause the fund to lag the performance of its index.

Consider the fund’s investment objectives, risks, charges and expenses carefully before you invest. The fund’s prospectus and summary prospectus contain this and other information. Call 800-977-2947 or visit for a prospectus, which you should read carefully before you invest. Praxis Mutual Funds are advised by Everence Capital Management and distributed through Foreside Financial Services, LLC, member FINRA. Investment products offered are not FDIC insured, may lose value, and have no bank guarantee.

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