since our update For social bonds in 2022, the market landscape for this type of sustainable bond has changed significantly. Although the global economy has overcome the COVID-19 pandemic, it now faces challenges such as high inflation, concerns about government fiscal austerity, and transition pressures on social security. A greener, more inclusive and fairer economy. Here we will explain recent trends.
Sustainable bond issuance fell for the first time in history in 2022, falling from a record US$1.1 trillion in 2021 to US$863 billion in 2022, similar to global bond issuance.
Social bonds were hardest hit, with issuance declining by 41%, with a slower decline continuing in the first quarter of 2023 (see Exhibit 1).
We believe that 2021 has been an exceptional year for social bonds, with the pandemic prompting huge capital mobilization as authorities respond to job and income losses amid other lockdown-related issues. I think it’s important to emphasize one thing.
What are social bonds?
Social bonds fund activities that help solve social problems such as inequality and access to affordable housing. The International Capital Markets Association’s Social Bond Principles date back to 2017 and provide voluntary process guidelines that encourage transparency and disclosure. Recently updated.
Since 2017, social bond issuance has taken off in earnest, recording a notable increase during the pandemic to fund spending on things like health needs and job protection.
Several players dominate the issuer landscape. The French government agency CADES is the world’s leading issuer. According to Responsible Investor, the CADES and EU SURE programs currently account for 32% and 33% of social bond issuance, respectively.
Corporate issuers are entering the market, but progress is slow.
Based on Bloomberg New Energy Finance Q1 2023 data, 77% of social bonds issued are from government-related issuers, 17% from financial institutions (such as banks), and the rest from consumer staples companies. It comes from non-financial corporations such as
This may reflect areas that can directly address social issues. In manufacturing and service industries, these problems are even more difficult to address directly.
That said, innovative bonds do exist. One example is the EDF Social Bond. Proceeds will be used to support expenditures on sourcing from suppliers located in less affluent regions of France. This can be seen as an intentional socially conscious effort by non-financial corporate issuers.
impact investing
Many investors are looking for credible impact investing, which means having a clear disclosure framework in place to prove that their money is making a difference, and allocating funds to activities that help achieve social goals. I’m increasingly asking you to.
However, social projects range from affordable housing to job creation, making harmonization and standardization of indicators difficult. For investors, obtaining clear and detailed data can be a major barrier to understanding how their overall investment improves social outcomes.
Unlike green bonds, where the proceeds are typically used for climate change mitigation and whose impact can be reported in terms of emissions reductions, etc., the diversity of social projects funded and the impact indicators vary for different social issues. Masu.
Nevertheless, the market is still relatively young and we are committed to continuing to demonstrate the benefits of social bonds. The latest version of the Harmonized Framework for Social Bond Impact Reporting, published by ICMA in June this year, should provide more clarity.
“Social cleansing”
In the parlance of the green investment market, investors are keen to avoid ‘social wash’ in social bond investments. Although this phrase has different meanings to different stakeholders, our definition is that there is no clear demonstration of how the proceeds are actually used to produce positive social outcomes. is.
For example, social bonds that finance highways that connect already well-connected urban settlements do not deliver clear social outcomes.
We use ‘ambition’, ‘specificity’ and ‘integrity’ as touchstones to avoid the risk of ‘social washing’ in investing. The issuer must indicate how it intends to contribute towards social goals, define specific target groups and social disparities, and ensure that the use of its proceeds will help these groups close such disparities. You should report how it helps you.
We expect that “social washing” will be regulated in the future, in line with the EU’s proposed ban on greenwashing.
conclusion
Demand for social bonds is expected to increase as investors increasingly seek to generate economic returns while making a positive contribution to society.
However, we believe that all social bond issues need to demonstrate ambition, specificity and integrity in order to maintain the label’s credibility and attract more investment. I am.
Although volumes have declined, we are optimistic about the recovery. The market is expected to grow in the coming years as the necessary regulatory environment is in place. We believe this is a market segment with a bright future.
Disclaimer
Please note that the article may contain technical language. Therefore, it may not be suitable for readers without professional investment experience. The views expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different views and make different investment decisions for different clients. This document does not constitute investment advice. The value of an investment and the income it generates may go down as well as up and investors may not recover their initial expenditure. Past performance does not guarantee future returns. Investing in emerging markets or specialized or restricted sectors may be subject to increased uncertainty due to a high degree of concentration, limited information availability, low liquidity, or high sensitivity to change. May be exposed to higher than average volatility. In market conditions (social, political and economic conditions). Some emerging markets have less security than most international developed markets. Therefore, services that perform portfolio trading, clearing, and preservation on behalf of funds invested in emerging markets may involve greater risk.
Environmental, social and governance (ESG) investment risks: lack of common or harmonized definitions and labels that integrate ESG and sustainability criteria at EU level, leading to differing expectations by management when setting ESG targets. approach may occur. This also helps integrate ESG and sustainability criteria, as the selection and weighting applied to a particular investment may be based on indicators that share the same name but have different underlying meanings. It also means that it can be difficult to compare different strategies. When evaluating securities based on ESG and sustainability criteria, the investment manager may also use data sources provided by her external ESG research provider. Given the evolving nature of ESG, these data sources may be incomplete, inaccurate, or unavailable for the foreseeable future. Applying standards of responsible business conduct in the investment process may result in the exclusion of certain issuers’ securities. Therefore, the performance (of a sub-fund) may be better or worse than that of an associated fund that does not apply such criteria.