Paving the way for social loans

Social bonds had their big breakthrough in 2020, jumping eight-fold compared to 2019, as governments and agencies started to view them as a key funding source for specific social projects. The pandemic helped fuel investor interest by putting the spotlight on social investing. Social loans are a related product likely to increase in popularity in the coming years, following the release of the Social Loan Principles in April 2021.

The need for long-term social investments has been a hot topic in recent years, and Swedish local government funding agency Kommuninvest has worked since 2019 to develop a social loan product with the potential of adding value to Swedish local government efforts.

“Our social lending program is driven by the members and owners of Kommuninvest, and aims to support and promote existing and future efforts to foster a more socially sustainable society. Sweden today faces a number of social challenges, more prominent in some geographical areas than others. On the back of our successful Green Loan Program, members asked us to investigate whether the same principles could be applied to social lending. The product we have launched is the result of this investigation,” says Björn Bergstrand, Head of Sustainability at Kommuninvest.

Why do you think social bonds and loans have not been as popular as green bonds and loans historically? What are the main challenges?

I suspect this is related to the development of the social bond market outside of Sweden and how Sweden views its welfare model. A number of social bonds issued by European entities target social housing, which is a concept we shy away from in Sweden. We strive for another approach in public sector housing. Up till now, Sweden has frankly lacked a mechanism to execute social financing in an appropriate format. Having said that, I would argue that the development of green finance in Sweden has brought us to where we are today, where a new market for social financing is now quite rapidly emerging.

Going deeper into your social lending program, in which categories can borrowers seek financing from Kommuninvest?

The framework contains three different loan categories: housing and residential environments;  safety, security and accessibility; and health, education, sports and culture. Within these three categories, two types of investments can be financed: physical investments with an associated social intervention or physical investments where the physical investment itself qualifies as the social intervention.

How are you identifying relevant projects for social loans? How can municipalities apply for them, and how do you assess different projects?

This is really up to our clients and borrowers. The first step is that local governments themselves identify relevant investment projects and their associated social interventions and check for compliance with the framework requirements. All loan applications are reviewed and approved by the Committee on Social Sustainability. The bond framework has been designed to be clear and concise regarding what can be financed, while at the same time leaving room for local creativity.

For the municipalities taking part in the pilot program, how extensive is the administrative work for them? Both in regards to impact reporting but also the application process.

There are two factors which will increase the administrative burden. However they are essential in the process and, I would argue, also add value. The first step is the initial loan application, which typically requires the borrower to bring together various internal competencies, and then it is the recurring impact reporting to Kommuninvest, which takes place annually. It is important for us to find the right balance of getting the information we need to assess each project, while not making it unreasonably demanding for the borrower. The benefits gained from the process include better cooperation internally, across disciplines and “silos”, ultimately promoting better governance and a stronger “impact assessment culture” within the public sector.

How do you measure the social impact of these social loans? How will target groups be defined for social loans?

This is a very important topic and a core component of the product concept. The framework requires the borrower to clearly outline the social objectives of a specific social intervention, and commit to monitoring impact for the target group in question. Again, it is up to the borrower to define, and preferably delimit, the target group, for instance, “people aged 18-24 in a certain area displaying certain social attributes”. We expect impact assessment to be carried out over a long period of time, since the outcomes and impacts of a social intervention can take a long time to materialize.

How have the municipalities responded to the social loan pilot phase?

We are very satisfied so far. Six of the 11 local government entities that were part of our advisory group have applied for a loan. Five of them now have an approved social sustainability loan. I suspect these customers can be viewed as pioneers, and take-up may be a bit slower now that the product is launched. However, we know from the launch seminar we just held that around 70 percent of participants deemed it likely, or relatively likely, that they would engage in an application process, so we are hopeful.

Do you see an issue with social washing?

The process we have established for project selection, review and approval is designed to mitigate precisely this risk, and to ensure that the social investments financed are of high quality and can reasonably be expected to contribute to reaching the identified social objectives. Specifically, we have established a highly competent expert committee to review and approve loan applications, and also to provide constructive feedback to customers.

How do you see the future for social bonds and loans? The investor demand is strong, but will other entities dare to use this format?

I expect other local governments to engage further, similar to the development we have seen in green finance. I also see opportunity for private and public property owners, particularly if they own real estate in socially challenged areas. For such actors, there is a strong business logic in in all matters sustainable, be it social or green.  A good example is from the city of Trollhättan, were we have financed the renovation and upgrade of an essentially deserted commercial center located in an unsafe and socially vulnerable area. The public housing company decided to move their head office to the renovated building, prompting others to follow suit. Not long after, the area has become vibrant, with an improved range of welfare and commercial services and several hundred jobs created. This is a very encouraging example of what can be achieved with a bit of imagination and courage.

What advice would you give to other companies wanting to put together a social loan framework? What challenges do you see?

One piece of advice is to look closely at the assets you want to include in the program and how to best leverage your capabilities to promote social sustainability via those assets. If issuing a social bond is the objective, then that bond must rely on eligible assets. If, as in our case, you are an intermediary that lacks “control of the assets”, then it is essential to understand client needs, e.g. the needs of the asset owners. Over the past two years, we have devoted a lot of time to speaking to a multitude of experts across academia, the public sector, and financial markets to get this right. Simply put, we have sought to listen closely to relevant stakeholders and align our product accordingly. The response has been phenomenal. The social bond market is clearly eagerly awaiting robust concepts for social financing.

Authors:

Ebba Ramel, Sustainable Finance Advisory, Nordea.

Johanna Björk, Sustainable Finance Advisory, Nordea