Nordea's Jacob Michaelsen: It’s time to work with the “S” in ESG

Issuance of social debt took off at the start of the pandemic, largely driven by the public agency effort to fund the public health and stimulus response to Covid-19. While the momentum has slowed down more recently, the importance of social debt continues to rise, Nordea’s Head of Sustainable Finance Advisory Jacob Michaelsen told Environmental Finance in an interview at its recent ESG in Fixed Income, EMEA Conference.

The growth of social bonds came on the back of the underlying use-of-proceeds infrastructure from the green bond market, according to Michaelsen. When the Covid crisis hit, SSA (sovereign, supranational and agency) issuers were able to “call their investors and say, ‘We’re doing the same thing we’ve been doing for a long time. Now we’re doing it in a social context,’” he said, adding:

“This was a silver lining in the beginning of the pandemic, but we’ve had some challenges in the last couple of months really continuing that growth.”

Investors have been interested in social investments for some time. However, the social bond market has historically lagged behind due to difficulties defining social impact metrics. Projects financed under social bonds aim to address a social issue or contribute to positive social developments. Social bonds, unlike green bonds, require the definition of a target population, which will benefit from the project financed.

Impact of the EU Platform’s Social Taxonomy

The EU Platform on Sustainable Finance, a group of experts from the public sector, industry and academia, recently released their proposal for a Social Taxonomy, a classification system for activities that contribute to and advance social welfare.

While Michaelsen welcomed the Social Taxonomy as a source of harmonisation and standardisation that would help address uncertainty in the market, he also urged market participants not to wait for the framework to move ahead.

“We need to work with what’s already there now. We need to keep pushing the market and figure out what works and what doesn’t,” he said.

Be specific to avoid ‘social washing’ concerns

He also emphasised that there are two fundamental structures for working with social issues in sustainable finance: a use-of-proceeds structure and a sustainability-linked structure. Social impact objectives are suited to both structures, according to Michaelsen.

“I think we’ll find in the sustainability-linked space that social KPIs will be a good way of bringing in that social component, whether it’s gender equality, health aspects or access to certain services,” he said.

A key consideration is to be as specific as possible – as learned from working with these structures in the green bond market, he said, adding:

“We really need to be focused on details and specificity in order to make sure we avoid any real concerns around social washing,” referring to companies misrepresenting how socially responsible they actually are.

Watch the interview with Environmental Finance here.