Social bond guidelines were published in 2016, paving the way for companies to issue bonds that lock in profits for purely social projects. Since then, the social bond market has mainly seen issuance of sovereign debt, but it really took off after the COVID-19 pandemic (Figure 1).
Figure 1: Green, social and sustainability bond issuance
Source: Bloomberg, Columbia Threadneedle Investments, as of August 23, 2023
Post-COVID-19, the breadth and depth of the labeled social bond market has steadily increased, with increased awareness of lending targeting social outcomes. Companies are now issuing labeled social bonds, with banks among the most influential issuers. Intesa issued its first $750 million social bond in May 2023 related to programs aimed at reducing unemployment resulting from the crisis and providing relief from natural disasters, health and social emergencies. AIB has $1.75 billion in social issues related to healthcare, education and social and affordable housing. And CaxiaBank has issued $5 billion since 2019, mainly related to job creation and business loans.[1]
Indeed, the debate has now switched from whether to issue green bonds to how to issue the appropriate type of green, social or sustainability bond.
Recognizing social issues in the broader label market
In addition to social bonds, there are also green bonds, which ring-fence the proceeds of green projects, and sustainability bonds, which can fund both green and social projects. However, both of these areas have seen a rise in the prevalence and awareness of social issues. We first learned this from the UK Treasury’s Green Gilt. This focuses the use of proceeds on social co-benefits through green infrastructure and green job creation.[2] Reports on these bonds improve our understanding of how green projects generate social co-benefits such as job creation, improved transportation, and increased energy efficiency in homes.
Issuance of sustainability-linked bonds (SLBs) with social KPIs is also increasing. For example, the Chilean government issued his SLB.[3] This included carbon targets and a commitment to improve the number of female directors in companies covered by the Financial Markets Commission to at least 40% by 2031. However, we remain of the view that SLB as a market requires significant improvement. In thought and intention, especially when it comes to setting tough and challenging goals. But I’m happy to see that social KPIs are starting to work.
Impact reporting is getting better and better
Although the reporting requirements outlined in the ICMA Guidelines are useful, we believe there is room for improvement. We would like to see more emphasis on evidence of market-wide impact. For example, it is essential to list key social and environmental indicators in relation to the impacts generated. We also suggest that indicators regarding target population research should be included in the report to assess how beneficial the project was. Few issuers do this, but we believe CaxiaBank’s Social Bond Impact Report is an exception and is the best-in-class that all impact reports should aspire to.
Experiments with various bond structures
Thematic bonds are now commonly issued in the market, locking in proceeds for projects that support specific issues. One example is the Asian Development Bank (ADB), which issued a series of ICMA-compliant social inclusion gender bonds in 2022. This will raise more than US$2.9 billion and focus on programs, projects, investments and loans in gender equality and women’s empowerment.[4] These programs recognize not only women’s vulnerability to climate change, but also the important role they have to play in climate adaptation and resilience strategies to cope with disasters and climate-related shocks and stresses.
Additional gender bonds, region-specific bonds, and health and education bonds are currently being issued. This continued innovation is a positive indicator of how financial products can create solutions to real-world problems.
conclusion
The social bond market has made great progress, with the breadth and depth of issuance expanding significantly. As an active investor, Columbia Threadneedle wants to positively impact the market and encourage the right types of issuance, but we also encourage governments, government agencies and other market participants to discuss the potential of social bonds. We are also working to warn them.
To this end, we are working to increase the uptake of our reporting efforts, especially our surveys. We want to see continued improvement of our Sustainability Linked Bond targets and believe this will be a powerful tool. And we want to see new forms of issuance by governments and companies. For example, where is the NHS bond?
As leading voices and advocates for the social (and green) bond market, we are excited about the potential of this growing market.
[1] BofA Global Research, Social Bonds: Developing Markets, July 10, 2023
[2] UK Government, UK’s first Green Gilt raises £10bn for green projects, 21 September 2021
[3] Gobierno de Chile, Sustainability Linked Bonds, June 2023
[4] ADB, Gender Bonds: From Sidelines to Center Stage, February 2023