- Céline Deroux, Fixed Income Strategist
- Lucia Meloni, Lead ESG Analyst, ESG Investments & Research
- Philippe Dehoux, Head of Global Bonds
- Vincent Compiègne, Deputy Global Head of ESG Investments & Research
Social bonds emerged less than a decade ago, but their impact is already starting to be felt. They are becoming an important source of finance for social projects of national and regional governments, international financial institutions and corporates.
The COVID-19 pandemic placed social factors centre stage, and public sector issuers wasted no time in deploying social bonds to advance their sustainability agenda. Social bond issuance reached USD 196 billion in 2021 (compared to just USD 10 billion in 2019), with the proceeds financing a wide range of pandemic-related recovery programmes. They included projects to improve access to healthcare and support job creation, such as the EU’s €100 billion SURE social bond program launched in October 2020 which provided short-term employment schemes and aimed to keep people in jobs during the coronavirus pandemic.
What are they and how do they work?
Social bonds are use of proceeds bonds which raise funds for new and existing projects that address or mitigate a specific social issue and/or seek to achieve positive social outcomes. They are part of the sustainable bonds universe, alongside their peers green and sustainability bonds.
The proceeds from social bonds can be used for a wide variety of purposes, making them a potentially powerful driver of social change. For example, affordable housing and essential infrastructure, access to essential services, employment generation, food security, sustainable food systems, and socioeconomic advancement and empowerment.
Issuance of sustainable and sustainability-linked (SLBs) bonds1, yearly, USD billion.
Source: Candriam, Bloomberg© as at 15/12/2021, Candriam’s expectations for 2022.
A research-intensive universe
Since the launch of the first issue in 2013 (“Banking on Women” bond from the International Finance Corporation (IFC)), the social bonds market has seen some healthy organic growth. However, investing in this area is not without challenges. The analysis of issuers and their use of proceeds - two essential elements of sustainable bond due diligence - require a great deal of specialist knowledge. They are based on detailed and comprehensive frameworks, each tailored to a particular type of sustainable debt.
In addition, there are still no universal standards for corporate ESG reporting. Sovereign issuers too are not yet bound by norms around the reporting of outcomes of their sustainability projects. So when, at times, there are gaps in available data, specialist ESG investment teams must be deployed to find the answers.
However, the EU is currently considering and consulting on new social taxonomy rules that may ultimately result in the emergence of reporting standards.
Towards Social Taxonomy
In July 2021, the social taxonomy subgroup of the EU Platform for Sustainable Finance published a first draft report on Social Taxonomy. If enacted, the new rules may give a much-needed focus on the social objectives of sustainability. They can also go a long way in helping social bonds reach a close alignment with the UN Sustainable Development Goals (SDGs).
It is proposed that the new social classification system is to be based on three objectives covering the following major stakeholder groups:
- Workers: decent work (including value-chain workers), including social dialogue, health and safety, and living wage
- Clients: adequate living standards and well-being, including healthcare, social housing and education
- Communities: inclusive and sustainable communities and societies, including basic economic infrastructure and helping people with disabilities participate in the life of their society
We are convinced that sustainable finance taxonomies will play an increasingly important part in directing capital to sustainable activities.
In the meantime, we also think that social bonds will continue to be a success story for several reasons. Social bonds are now widely used for major sustainable public sector projects. Corporate issuers also increasingly use them to mitigate a wide range of social risks that impact their businesses. In addition, the new EU social taxonomy will help to provide a regulatory framework, boosting social bonds’ appeal even further. If the new taxonomy rules come into force as we hope, investors would benefit from meeting its criteria set, aligning fully with the new framework.
Important Disclosure
This document is provided for information and educational purposes only and may contain Candriam’s opinion and proprietary information. The opinions, analysis and views expressed in this document are provided for information purposes only, it does not constitute an offer to buy or sell financial instruments, nor does it represent an investment recommendation or confirm any kind of transaction. Although Candriam selects carefully the data and sources within this document, errors or omissions cannot be excluded a priori. Candriam cannot be held liable for any direct or indirect losses as a result of the use of this document. The intellectual property rights of Candriam must be respected at all times, contents of this document may not be reproduced without prior written approval.
Candriam consistently recommends investors to consult via our website www.candriam.com the key information document, prospectus, and all other relevant information prior to investing in one of our funds, including the net asset value (“NAV") of the funds. This information is available either in English or in local languages for each country where the fund’s marketing is approved.
1 Sustainability-linked fund general corporate activities rather than specific projects, with the coupon linked to predefined sustainability objectives.