“Social bonds” – an admittedly loose term in developing finance – are quickly becoming one of the Next-Big-Things. In fact, since 2017, the International Finance Corporation (an affiliate of the World Bank) has issued 39 social bonds totaling more then $3 billion. While the issuance of traditional forms of bonds is expected to decline this year, social bond issuance is skyrocketing.
So what gives? Is this a fad, or an important new trend? And how can we be sure meaningful impacts are achieved?
First, some basics. According to the International Capital Markets Association (ICMA) – the leading industry association for bond market participants – social bonds are what they call “use of proceeds bonds” that raise funds from investors for new and existing projects with positive social outcomes. The ICMA has even published Social Bond Principles (see https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2020/Social-Bond-PrinciplesJune-2020-090620.pdf), a set of voluntary guidelines for issuing these kinds of instruments.
Are social bonds the same as sustainability bonds? What about green bonds? Well, in many respects classification of these various bond types is still a bit of a dark art. For what it’s worth, ICMA distinguishes between social bonds, sustainability bonds, and green bonds, all under the general umbrella of “sustainable debt markets”.
In any event, the numbers tell the tale. Total social bond issuance in 2019 was around $20 billion, which comprised only 5% of overall sustainable debt issuance of some $400 billion. But this picture is rapidly changing. Morgan Stanley, a leading investment bank, reports that the issuance of new social and sustainability bonds combined reached $32 billion in April 2020 alone. Moreover, this was the first time in history that these kinds of bonds outpaced the issuance of green bonds in a single month.
So who is benefiting from this growing business? In theory, it should all be about improving lives in underserved countries and communities. Social bonds typically focus on outcomes such as enhanced food security, improved education, access to health care, and building local financing capacity – all great aims in working toward the Sustainable Development Goals.
In practice, the picture is still evolving. Certainly, the investor community has hoped on board. In 2017, the Council of Europe Development Bank issued a 10-year bond totaling EUR 500 million, with proceeds allocated to social housing, education, and micro-to-small enterprises. Interestingly, investors in the bond were spit relatively equally between central banks, financial institutions, asset managers, and institutional investors – all eager participants in demonstrating socially-responsible investing.
As well, investment banks are staunch supporters, not least due to underwriting fees they can earn by structuring and selling these bonds. How lucrative is this business? Recall above, the $32 billion in sustainability and social bonds issued in April 2020. Assuming a relatively conservative upfront underwriting fee of 0.5% (these fees can vary for a host of reasons, but generally fall in the range of 0.25% to 0.70%), this equates to $160 million. Project that out over a year and you have a $2 billion global niche industry for these banks.
Finally, what about end beneficiaries? How many lives are being improved on the ground? And it is all worth the cost? Here, the picture is still fuzzy; in many ways, the measurement of results is still scrambling to catch up to the issuance of the bonds. According to a 2018 report by Impact Investment Lab (see https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Public-research-resources/II-LAB2019-02Social-Bonds-130219.pdf), several issues persists: (i) impact reports favour outputs (e.g., numbers of SMEs financed) over impact (e.g., improvements in health); (ii) data collecting and processing mechanisms are lagging; and (iii) impact evaluation approaches lack harmonization. Further, Standard & Poor’s, an international agency that rates social bonds, notes that “while significant steps have been made to standardize social bond disclosure and reporting, we believe issues persist and improvements have been slow to proliferate”.
All in all, we can applaud the growing interest in social bonds by the investment community, and the promise these instruments hold to change lives and livelihoods for the better. However, it will take sustained engagement from actors across the development funding spectrum to ensure social bonds continue to evolve to meet their tremendous potential.