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Filed under: July 2002

What’s that smell…the bond alternative

The past year has seen the credibility of corporate CEO’s sink to somewhere near the level that we usually reserve for our politicians. Execs are accused of inflating profits to make their books look good, profiting from insider trades, cashing lucrative stock options while their companies flounder in red ink, and other business shenanigans that can make investing in the stock market look decidedly unappetizing. Crikey, even Martha Stewart Inc. has something rotten in her kitchen.

Many people are just not comfortable with the risk inherent in owning stock, even without the unpleasant odour emanating from all those boardrooms. While risk can never be entirely eliminated from any investment portfolio, bonds are generally seen as a safer place to invest than stocks and are issued by many companies and all levels of government. You buy a bond, they agree to pay you a specified rate of interest for a specified time and then repay your loan. Pretty simple.

Fact is, many businesses would have an impossible time staying afloat if they could not raise money from shareholders or bondholders. Investors (and consumers) wield enormous influence when it comes to directing the flow of capital in our society. Socially responsible investors understand this, and therefore seek to purchase the stocks and bonds of companies that deliver on what is known as the ‘triple bottom line’, that is, those that achieve social and environmental benefits as well as economic ones.

Is it possible to find bonds that would suit an ethical portfolio? You may be surprised at the range of options. Whether these organizations are compatible with your values and concerns is, of course, a highly personal matter. For example, while the oil industry itself may not seem too tasteful, Suncor Inc. has a positive record of environmental progress and maintains excellent relations with the First Nations communities affected by their work.

IBM is a company that ‘walks the talk’ when it comes to encouraging workplace diversity. According to a senior IBM executive, their effort to diversify IBM’s workforce “has moved from being a moral imperative to being a strategic imperative.” IBM sponsors summer tech camps for girls in Grades 7 and 8 in the hopes of encouraging them to develop their math and science skills in high school, stays in touch with these girls through ‘e-mentors” drawn from IBM’s senior-level female ranks, and promotes a healthy proportion of women to executive positions within the organization. IBM has similar programs for other ‘visible minorities’. Martha Stewart notwithstanding, I can’t help but think that promoting more women to upper management would go a long way towards cutting out some of the corporate rot that we can smell. (OK guys, fire away…)

The following is just a small sampling of who issues bonds in Canada:

Government of Canada, BC Telecom, Canada Mortgage and Housing Corp. , BC Gas Utilities, Govt of Canada Export Development, Canadian Tire, Govt of Canada Farm Credit, IBM Canada, All Provincial Governments Nav Canada, BC Hydro, Loblaws, Hydro Quebec, Molson Breweries, BC Municipal Finance Authority, Royal Bank, City of Vancouver, Suncor Inc., Vancouver International Airport and York University.

These bonds are currently returning anywhere from 4% to 7% or more depending on how the markets view the credit quality of the bond issuer, the length of time remaining until the bond matures, and a lot of other factors that influence their returns, including the willingness of people to actually buy the things.

Individuals who are concerned about good corporate governance and all that entails can direct the fixed-income, or bond portions of their portfolios towards companies, governments or other entities that are more closely attuned to their personal values. This is your right as a provider of investment capital to our economy. If it smells rotten to you, then don’t put it on your plate. You might be surprised at how fast corporations will cook up something more palatable. The heat on them to act in a fair, truthful and ethical manner has never been more intense, and this should provide some degree of comfort to everyone.

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