Over the first nine months of 2020, markets saw social bond issuance of US$80bn invested in areas such as housing, healthcare and employment, and their recent growth echoes the previous growth trend in so-called green bonds. Where does the appeal for these fixed income instruments lie, what do they invest in and just how big could the market become?
The growth of the impact bond market in recent years has shown how investors are increasingly building positive impact themes into their investment considerations and analysis. However, while the green bond market has gained in maturity and liquidity, social bonds have emerged as a new growth area in the impact debt capital markets.
Figure 1: Social bond issuance has surged in 20201
What are social bonds and what do they invest in?
It can be helpful to think of social bonds in the context of green bonds. While green bonds allocate proceeds to projects for environmental benefit, social bonds have the distinct feature of channelling capital to projects with positive social outcomes. (Bonds that intentionally blend green and social outcomes are referred to as sustainability bonds.)
The International Capital Market Association (ICMA), whose Social Bond Principles have become the leading framework globally for issuance of social bonds, defines social bonds as fixed income instruments whose proceeds are “exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects”.2 These projects aim to address or mitigate a specific social issue or seek to achieve positive social outcomes. Unlike social impact bonds – whose proceeds to investors, usually from a government, are contingent on the success of the targeted social programme – proceeds from social bonds are channelled to projects that provide access to essential services like healthcare, education and financial services, affordable housing, and basic infrastructure such as sanitation, transport, and clean drinking water.
The appeal of social bonds
Appetite for impact bonds has increased in recent years as investors have begun to realise that they can vote and engage on a range of ESG issues through the use-of-proceeds of their fixed income investments. There have been several reasons for the increase in social bond issuance in particular, but the most significant force has been investor demand, which has driven governments and corporates alike to deliver on the premise of responsible investing.
A particularly attractive feature of social bonds is flexibility. Social bonds allow for a much broader range of projects than green bonds, making them attractive for investors looking to meet UN Sustainable Development Goals and Corporate Social Responsibility initiatives. Additionally, the increased demand for social bonds may also be attributed to familiarity: some investors may be more familiar with the concepts of socially responsible investing than they are with those of green bonds, which are more climate and/or environmentally focused.
Green bonds have historically dominated the impact bond issuance market. More than US$744bn3 has been raised in green bond issuance since 2007, when the European Investment Bank issued its inaugural impact bond. However, social bonds have followed green bonds’ trajectory, particularly since COVID-19 with issuance in the first half of 2020 clearing US$20bn, more than doubled the total amount of social bonds issued in 2019.4
Since the emergence of COVID-19, there has been an uptick in COVID-19 related social bonds, where supranationals, sovereigns and agencies seem to be leading the way. For example, in March 2020, the International Finance Corporate (IFC) issued its largest social bond ever to finance its response to the coronavirus while the African Development Bank also launched a US$3 billion "Fight COVID-19" social bond. Additionally, Unédic, the French unemployment agency, issued two separate €4bn social bonds in May and June 2020, the two largest social bond issuances ever.
The social bond market is likely to continue growing. In March 2020, ICMA highlighted the relevance of social bonds in addressing the coronavirus pandemic and provided additional guidance for eligible social projects, which now include coronavirus-related health care and medical research, vaccine development, and medical equipment investments.
The increased scope of eligible projects is likely to encourage issuers to become more active in the space. Additionally, the diversification of issuers is likely to evolve in a similar manner to the green bond market, with supranationals leading in the market’s early years and other investor types following as more and more issuers look to demonstrate support for social issues while delivering investment returns.
1Source: Insight Investment. Bloomberg data as at 30 September 2020. Total issuance by year.
3Source: Bloomberg. Data as at 30 June 2020.
4Source: Climate Bonds Initiative.