Each year that goes by, more investors are interesting in aligning their investments with their values. There are several names for this (ESG, SRI, Impact investing, etc.). I prefer to call it values-based investing because that sounds less jargony.
Values-based investing either avoids buying stocks/bonds of questionable businesses or proactively searches out businesses that embody values important to you and invests more in them. When you apply this to stocks, there’s an argument to be made that you may enhance returns. Companies doing the right thing may attract better talent and grow faster than other companies.
With bonds, you are giving up returns to support your values. That may not be a bad thing, but the math is clear. A company will issue a bond at the lowest interest rate possible. Say Target wants to invest in solar panels to power its stores. They can finance this project with bonds and get a lower interest rate by telling people that they are supporting renewable energy.
Likewise let’s say Phillip Morris wants to issue a bond. Many investors will be turned off because they won’t want to support tobacco. With less buyers for its bonds, Phillip Morris would pay a higher interest rate.
This is not to say that you shouldn’t align your bond investments with your values. It is to say that doing so is likely to lower your returns. Know what you’re getting.
About the Author: John O’Connor
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