Credit strategy links financial return to social, environmental impact

As investor demand for funds that demonstrate positive social and environmental impacts as well as financial returns increase, a recently launched impact credit strategy managed by Regnan is outperforming its benchmark.

In late January of this year, Regnan launched the Regnan Credit Impact Trust, which invests in Investment Grade Australian fixed and floating rate securities. The fund focuses on investing in impact bonds to generate social and environmental outcomes alongside financial returns. The fund has returned 2.18% (gross- as at Sept 2020) since inception in January 2020, outperforming its benchmark by 1.95%.

The Fund capacity is relatively small as there is limited but growing issuance of Australian-dollar denominated impact (green/social/sustainable) investment grade credit. Regnan will work with a limited number of advisers who have mission-driven clients, noted Jeremy Dean, head of Regnan and responsible investment distribution at Pendal Group.

This is the first strategy launched under the Regnan brand, which is wholly owned by Pendal.

"Although we are looking at mission-driven clients and not-for-profits who want to invest with us, we see this as a stepping stone strategy for clients who want impact and financial returns, but don't know where to start.

There are strict definitions of impact for the trust.

"For it to be impactful, it has to have intentionality, additionally and we need to measure the outcomes created by the bond," Dean noted. "There are lots of bonds out there that are a securitisation of existing loans, and all of those loans are to existing wind farms. We're happy to own those, but they are less impactful than new projects. They're green and they're certified, so on and so forth, but the purity of impact is when the capital is going into new projects."

The impact fund invests in investment grade securities where the projects have clear definition of the use of proceeds and the reporting to back that up, Dean said.

"We require regular reporting on the use of proceeds, and we want to be able to understand the metrics of how they're going to measure the impact that they're purporting to have," he said.  "We have built a proprietary impact data base of all the bonds we have held, in order to understand and measure the impact investors have funded. We are able to demonstrate back to investor the change they are driving across renewable energy, low carbon transport, waste, access to education, sustainable agriculture and social and affordable housing."

This can require a great deal of scrutiny, examining each bond for level and depth of disclosure and description of use of proceeds and how they're measuring outputs, Dean explained.

"Each bond will have a different way of reporting the impact of the project," he said. "Our impact database process is incredibly complex and time consuming, however our clients find our impact reporting very helpful in synthesizing the portfolios contribution to social and environmental outcomes.

Dean cited their investment in a bond issued by the National Housing Finance and Investment Corporation, a federal government corporate agency (NHFIC) providing funding for community housing projects.

"We have begun a dialogue with the NHFIC team to really understand and follow the capital to see the beneficiaries of the social and affordable housing.  We have met with a number of tenants and it is truly amazing to see the impact that can be made on an individual, family and society.

The portfolio currently holds 23  securities overall, ranging from issuance by the Australian Major banks who have issued Climate bonds , the Asian Development Bank Green Bond, Aquasure Victorian desalination plant project, the Inter-America Development bank Social Bond, and the above noted National Housing Finance Investment Corporate Bond.

Read more: AquasureAsian Development Bank Green BondJeremy DeanNational Housing Finance Investment Corporate BondPendal GroupRegnan Credit Impact Trust
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