Bonds an un-tapped financing source for charities, Bayes Business School study finds

Despite the trend towards corporations issuing ESG bonds, few charities have seen the financial instrument as a source of funding, an academic study published today reveals.

The white paper from Bayes Business School, which was commissioned by RCB-Bonds plc, suggests that targeted regulatory actions and innovation from both the third sector and investors could boost the use of such bonds.

Report authors Sonia Falconieri and Aneel Keswani, professors of finance at Bayes, recommend steps to address the demand and supply-side impediments that have deterred both charities and potential investors.

Professor Keswani said: “Some of the policy measures we suggest are relatively straightforward. These include improving financial education for charity trustees, introducing third-party credit guarantees, greater regulatory flexibility and clearer investment guidance. Together, these measures could provide an income stream that complements grant funding and social investment.”

Professor Falconieri said: “Interestingly, although advisers were confident about their ability to advise on green bonds and ESG strategies, most said they would need specialist support to recommend charity-issued bonds. That indicates a skills and confidence gap.

“Realistic expectations and targeted policy support can unlock capital for charities where it can have the greatest impact.”

Charities, the authors suggest, could develop credit enhancement mechanisms (which boost the credit worthiness of underlying assets) and shared collateral facilities. These could reduce borrowing costs for third sector organisations with few assets. These measures, the report says, could modestly broaden the pool of potential bond issuers beyond the housing sector, where most current charity bonds are concentrated.

Other proposals include:

• Combining funds from several investors in pooled investment vehicles to create a single, larger portfolio – improving diversification options and reducing transactions costs.
• Action by the Financial Conduct Authority to include charity issues within the proposed definition for ‘plain vanilla listed bonds’ bonds following the regulator’s recent consultation. This would reduce costs and boost visibility without compromising investor protection.
• Education around the Charity Commission guidance on investments (CC14), which was updated in 2023 to reassure trustees that charity bonds are consistent with their fiduciary duties.

Henrietta Podd, Head of Advisory & Funding at Allia C&C said: “At Allia C&C, we believe issuing listed bonds sold to institutional and retail investors is one of the ways charities can fund investment to accelerate and amplify their social and environmental impact. The Bayes Business School study highlights both the untapped potential and the barriers charities face in accessing the bond market.

“Individuals and institutions alike would have more opportunities to invest in listed, tradable bonds that deliver regular returns, while enabling funding for projects that make a difference.”

A review of major charities’ investment policies, including those of the Wellcome Trust and the Leverhulme Trust, highlighted that most charities are not looking for social impact from their investments but are instead focussed on getting the highest returns with some minimal screening out of investments in “sin” sectors.

Smaller charities often lack the balance sheet strength or stable income to raise debt in capital markets, but larger and exempt charities can more feasibly access bond financing as an alternative to bank loan or donations to fund their capital investment.