27-03-2023 15:52

Social bonds: Investing to improve social conditions

Environmental issues have been at the top of the sustainability agenda for a long time. While climate change is an urgent challenge for the world, social challenges are becoming increasingly evident as well. The two themes are also closely interlinked.

Investors have an important role to play to steer capital towards solutions that can improve social conditions. The most direct way to impact social conditions is probably to finance or refinance social projects. This can be done through social bonds, which represent one of the most dynamic, fastest-growing segments in fixed Income right now. According to Standard and Poor’s, social bond issuance grew from 14 to 165 billion US dollars from 2018 to 2022 – an increase of more than 1100%.

1100%

Increase in social bond issuance from 2018 to 2022

What are social bonds?

Social bonds are issued to raise funds for new and existing projects with positive social outcomes. Social projects include themes such as:

Affordable basic infrastructure: access to clean drinking water, sanitation, transport and energy
Affordable housing: addressing the housing needs of lower or middle income households
Food security and sustainable food systems: access to safe and sufficient food that meets dietary needs and requirements
Access to essential services: healthcare, financial services, education and training
Socioeconomic advancement and empowerment: equitable access to resources, services and opportunities.

The target group for social projects is primarily vulnerable population groups. For example people living below the poverty line, excluded or marginalised populations, people with disabilities, migrants and undereducated persons. The issuers of social bonds are typically agencies, governments, corporates and international groups of states, such as the European Union.

The role of social bonds in an investment portfolio

Social bonds give investors the opportunity to improve the social profile of their portfolios and to make a measurable impact by investing in social projects and or companies. By replacing some of the fixed income exposure, investors can obtain a portfolio with an improved sustainability level but with similar risk and return characteristics.

What to look out for when investing in social bonds?

To make an impact it is important to make a thorough assessment of the bonds and to follow up on whether the proceeds end up where they are intended. The International Capital Market Association (ICMA) has created the Social Bond Principles, which outline best practices when issuing social bonds. Social bonds aligned with these principles should provide transparent social credentials alongside an investment opportunity.

The ICMA Social Bond Principles require clarity about a bond’s:

stated use of proceeds
process for project evaluation and selection
process for management of proceeds and
commitment to ongoing reporting of the social performance of the use of proceeds.

The ICMA guidelines are voluntary and the definition of a social (or green) bond is rather broad. It is therefore important that investors carefully asses the issuers’ documentation to determine the underlying use of proceeds and the expected impact. Furthermore, although the ICMA guidelines require commitment to ongoing reporting, investors should follow up to ensure that the proceeds end up where expected.

For example, a health care company can issue a social bond where the proceeds are intended to finance projects to provide essential medical services in countries with aging populations. The company should then regularly publish reports with relevant impact metrics such as number of beneficiaries or facilities built.

Private investors can get exposure to social bonds through an investment fund. In those cases the fund manager must ensure the quality of the social bond issuers from a sustainability as well as a financial perspective and follow up on the reporting of proceeds. At Nordea we currently offer a social bond fund which is included in our Sustainable Choice product range.