• Cam Anderson

Could impact bonds seed our future legacies?

Updated: Nov 9, 2020

Investors today are helping build a sustainable future by buying bonds at lower than market interest rates to raise funds to assist those in need. These types of securities could be called "Impact" or "Community" bonds. Acceptance and demand are gathering momentum. Here are two examples:

The Bank of America announced on Sept 25th the issuance of a $2 Billion bond at an interest rate of 0.98% to advance racial equality, economic opportunity, and environmental sustainability, the first offering of its kind in the financial services industry.

This bond is Bank of America's eighth environmental, social, and governance (ESG)-themed corporate bond, bringing the firm's aggregate total of issuance to $9.85 billion.

In Canada, Van City offers an "Impact GIC" to commercial customers at interest rates as low as 0.65%. Their Impact GICs offer organizations the ability to support transformational work in the community …with a positive impact, like affordable housing, clean energy, and green buildings.

Van City and the Bank of America's offers confirm investors' willingness to invest at lower return rates for a noble cause. Investors will accept 1% return rates to aid society when they could demand more.

What a welcome new approach to helping our communities reach essential goals!

Aligned with this website's mission, i.e., creating funds for future legacies, the question that comes to mind is, could this approach help?

Let's assume investors bought $100 million of ‘Future Legacy Impact Bonds’ offered with a 1% interest rate. The money raised could then be invested at an average return of 9% per year. After costs and inflation, the net return could average 4%, which would effectively double the value over eighteen years. In this way, $100 million remains after the repayment of the bonds.

Where would this $100 million come from?

Retirement funds are an excellent place to secure funding provided the investment meets CRA qualification rules. Currently, retirement fund balances in Canada exceed $2 trillion, with $40 billion added annually.

Many investment types are qualified for retirement fund purchases, among them, for example:

"a debt obligation issued by a corporation, mutual fund trust or limited partnership the shares or units of which are listed on a designated stock exchange in Canada."

Thus an impact bond with a 1% return offered by a corporation listed on the Canadian stock exchange should be acceptable in an RRSP or RRIF portfolio and would be a useful contribution to creating fund generators.

Could tax be saved?

While there is no direct tax deduction for the money raised by impact bond purchases, the tax savings can be nearly equivalent.

An RRSP converts to an RRIF when the account holder either turns 71 or begins withdrawals. This annual withdrawal is fully taxable, so the more money in the account, the more taxes accrue.

As impact bond interest returns are low, balances for accounts holding them grow more slowly. The difference in growth means the eventual withdrawal of money is lower, and therefore the tax payable is less.

While lower returns (instead of highest possible) in any savings account is not the usual goal, the security offered to retirees combined with the community impact makes this attractive. Furthermore, for retirees, the fund's growth years are long gone; now, their main objective is their pension.

In summary, an impact bond, coupled with RRSP eligibility, and tax savings, provides an excellent source of seed funds for future legacies and is an avenue worth pursuing.

Photo by Ali Kazal on Unsplash

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