In 2016 the Social Bond Guidelines were published, paving the way for corporates to issue bonds where the proceeds would be ringfenced for purely social projects. The social bond market subsequently saw some issuance, mainly from sovereigns, 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 at 23 August 2023
Post-Covid we have seen a greater awareness of financing which targets social outcomes, and the breadth and depth of the labelled social bond market has steadily increased. Corporates are now issuing labelled social bonds, with banks among the most impactful issuers: Intesa issued an inaugural $750 million social bond in May 2023 which relates to programmes aimed at alleviating unemployment stemming from crises, and relief from natural disaster and health or social emergencies; AIB has $1.75 billion of social issuance related to healthcare, education and social and affordable housing; and CaxiaBank has issued $5 billion since 2019 mostly relating to jobs creation and business loans.[1]
Indeed, the conversation has now switched from whether to issue a green bond to how to issue the right type of green, social or sustainability bond.
Recognition of social Issues in the wider labelled market
As well as social bonds, there are also green bonds which ringfence proceeds for green projects, and sustainability bonds which may fund both green and social projects. Within both these areas, however, we have seen improvement in the prevalence and awareness of social issues. We first saw this from the UK Treasury green gilt, whereby the use-of-proceeds is focused on green infrastructure and social co-benefits through the creation of green jobs.[2] The reporting around these bonds will improve the understanding of how green projects may produce social co-benefits such as job creation, improved transportation and more energy efficient homes.
We have also seen an increase in sustainability-linked bonds (SLB) issued with social KPIs. For example, the Chile government issued an SLB[3] which included carbon targets and a commitment to improve the number of women in board positions to at least 40% in companies under the scope of the Financial Market Commission by 2031. However, we have not changed our view that SLBs as a market requires significant improvements in thought and intent, particularly around the setting of stringent and challenging targets. But we are pleased social KPIs are coming into play.
Reporting of impact gets better and better
While the reporting requirements outlined by ICMA guidelines are useful, we believe there is scope for improvement. We would like to see greater focus on evidence of impact across the market - for example, listing key social and environmental metrics in relation to the impact generated is essential. We also propose that reporting should include metrics relating to surveying target populations in order to assess how beneficial the projects have been. Few issuers do this, although CaxiaBank's social bond impact report is an exception and, in our opinion, the best-in-class to which all impact reports should aspire.
Experimenting with different bond structures
Themed bonds are now being issued commonly in the market, ringfencing proceeds for projects which support a specific issue. One such example is Asia Development Bank (ADB), which issued a series of ICMA-compliant social inclusion gender bonds in 2022.This raised more than US$2.9 billion and focus on programmes, projects, investments and loans in gender equality and women's empowerment.[4] These programmes also recognise the vulnerability of women in climate shocks, as well as the important role women need to play in climate adaptation and in resilience strategies that deal with disaster and climate-related shocks and stresses.
We have now seen further gender bonds, specific geography-targeting bonds, healthcare and education bonds issued. This continued innovation is a positive indicator of how financial instruments can produce solutions to real world issues.
Conclusions
The social bond market has come a long way, with the breadth and depth of issuance growing hugely. As active investors, Columbia Threadneedle wants to positively influence the market and encourage the right kind of issuance, but also lobby governments, agencies and other market participants to alert them to the potential of social bonds.
To that end, we are working on engagement within reporting and in particular to increase the prevalence of surveys; we want to see sustained improvements in sustainability-linked bond targets, which we believe can be a powerful tool; and we want to see new forms of issuance from governments and corporates - where, for example, is an NHS bond?
As a leading voice and advocate of the social (and green) bond markets we are excited about the potential of this growing market.
