In the wake of COVID 19 crisis, the markets have observed a surge in social bonds emissions. As of September 30, prior to the up to €100bn first social bond of the European Union (SURE employment scheme), the volume of social bonds issued was more than eight-fold the one in 2019 at the date, $85bn vs $10bn. The total market size was estimated to be $155bn for social bonds and $681bn for green bonds. There is still room for growth as shown in the following illustration.
What is a social bond?
Social bonds are debt products structured in order to use their proceeds to pursue social objectives. This is comparable to green bonds which are designed to fund environmental sustainability projects. As to be seen on the graphic below from SEB, most issuers are government agencies (with either a domestic or international activity).
The transparency and standard challenge
Social bonds may encounter pitfalls such as those which we have seen for gree bonds. One major pitfall is the lack of transparency which might lead to distrust from the clients. All the more so as a wide number of bond categories emerged, generating growing confusion: sustainability bonds (combination of green and social assets), sustainability-linked bonds, covid bonds…
For now, the market relies on guidance such as the Social Bonds Principles, stated by the International Capital Market Association. These principles strongly focus on transparency, namely in the use and management of proceeds, including projects selection and follow up.
In a medium long term, though, there should be high expectation for a standard based on the taxonomy, as AMF (Autorité des Marchés Financiers) explains in its answer to the consultation around the creation of a European standard for green bond.
Investment resources for social finance intermediaries
There are very different structures of social bonds (type of issuers, projects financed, social objectives and reporting…). A few of them have been interestingly depicted in a study published in June by ICMA.
Social bonds structured for ICO, the Spanish state-owned bank (€3,5bn since 2015), seem particularly interesting when it comes to social finance. Among outcomes such as improving the quality of education, supporting employment preservation and generation in deprived areas it also emphasized the promotion of local social solidarity economic development via the funding of social enterprises through investments in social investment funds.
On the same note, the social bond (€300m) issued in 2018 by Danone, one of the rare corporates active on the market as of today, entails social inclusiveness as a use of proceeds. It can be achieved through investments either directly into social businesses or indirectly through social impact investors. Beyond the detailed funded initiatives, it might be interesting to inquire in detail the bond’s projects ‘portfolio.
Social finance intermediaries, as key players in efficient funding towards achievement of social goals, could find greater support from government agencies as current or future issuers of social bonds. The relative fixed payment schedule will still be an issue to tackle. Social finance intermediaries often have unpredictable cash flows which make it difficult to align social objectives with financial sustainability. As always, capital has to be patient so as not to miss its expected return(s).