Eye Bonds Pioneer New Way to Finance Medical Research (and Maybe Help Cure Blindness)


Legislation has been introduced in the US Congress to provide a partial government guarantee for $1 billion in Eye Bonds, a five-year pilot program to finance research for curing blindness and develop a new way to finance medical research designed to appeal to impact investors.

The green bonds the World Bank has guaranteed since 2007 are one of the models for the program. These have grown to a volume of more than $500 billion as the guarantee enforces environmental criteria and gives investors confidence that the financing will be effective and the bonds will be repaid.

The new instruments are the brainchild of Karen Petrou, an influential banking analyst and consultant who has a personal interest in curing blindness – while in high school she was diagnosed with retinitis pigmentosa, a disorder that leads to progressive impairment of vision and eventually to blindness. At 66, Petrou is now almost completely blind; she has a guide dog and digests voluminous regulatory materials with screen-reading software that blasts her with 400 words a minute.

Narrow focus

Top ophthalmic scientists have told Petrou that a billion dollarsOpens a new window would enable researchers to find a cure for virtually every type of blindness within 10 years.

The pilot program focuses on the conditions of blindness and severe visual impairment because Petrou, who developed the concept with her husband, Basil, knows investors prefer to calculate risks and returns on narrowly-focused projects.

Eye Bonds could be a precursor for a general asset class of Bio Bonds, with other issues secured by debt to research cancer, Alzheimer’s or Parkinson’s diseases.

The National Eye Institute, a division of the US National Institutes of Health, would vet research projects to pick those with the best chance of success. In this way, the bonds would imitate mortgage-backed bonds, with the institute functioning as credit scorer and private sector financial institutions developing appropriate loan standards to extend credit.

The process could be duplicated with the National Cancer Institute, the National Institute of Aging, and other highly regarded medical research agencies.

Eligible asset

The bill seeking a partial government guarantee for the bonds, the Faster Treatment and Cures for Eye Diseases ActOpens a new window  (H.R. 2620), duplicates legislation originally introduced last yearOpens a new window but not acted upon. Georgia Democrat Sanford Bishop sponsored the new bill in the House of Representatives, while Washington Republican Cathy McMorris Rodgers headed a list of half a dozen co-sponsors on both sides of the aisle.

The government guarantee is critical to make the bond an eligible asset for pension funds and other institutional investors mindful of their fiduciary responsibility. Not only does it mitigate loss of capital, the guarantee puts in additional backstops that further reduce risk, enabling the bonds to offer a rate of return close to that of comparable investments with a similar risk profile.

As Petrou has notedOpens a new window , this is what made the critical difference with the green bonds guaranteed by the World Bank. It was not that sustainable finance became safer, but the stamp of approval provided by the guarantee gave investors confidence to follow through on their own desire to help combat climate change.

This is how impact investing works. “There are billions – maybe even trillions – of capital on the sidelines waiting to find ways to invest in public welfare projects as long as private wealth is not put at undue risk,” Petrou wrote in a memorandum marking the re-introduction of the guarantee legislationOpens a new window .

Portfolio diversification

Aside from her personal interest, Petrou says targeting a single condition such as blindness makes it easier for investors to evaluate the bond. “Each of these bonds is a single asset class because it’s possible to model risk, anticipate prepayment, and ensure real exposure diversification only within a unified set of assets,” she wrote. Diversification comes through a portfolio of bond holdings, not in a single asset-backed security.

Socially responsible investing has exploded in popularityOpens a new window , growing by an average of 40% since 2016 to reach $12 trillion. A majority of individuals with retirement plans now want an option covering environmental, social and governance (ESG) criteria, a proxy for socially responsible investing.

A recent Nielsen survey has found that sustainability is no longer a niche play, either for companies or asset managers. Supporters of the Eye Bond and Bio Bonds want to tap into those funds to tackle some of society’s most intractable illnesses.