A Look at the Market for Social Bonds

A social bond is a bond instrument where the proceeds are exclusively applied to finance a project that delivers social outcomes. Project examples include access to essential services (e.g. health, education and financial services), affordable housing and microfinance. The target population is typically comprised of people who are living below the poverty line, underserved or in some other way excluded and/or marginalised.

IFG has previously arranged the issuance of social bonds for two UK disability charities, Scope and Thera, where the use of proceeds was to provide additional support services to individuals with a learning disability, including in the case of Scope a peer support scheme for parents, support growth in its donor base and the opening of new outlets whose profit would fund additional service delivery.

Other issuances of social bonds include:

• The IFC 2017 Social Bond Programme addresses social issues for targeted populations, such as access to finance for women entrepreneurs, as well as low-income communities in emerging markets
• The Lloyds Bank 2014 Helping Britain Prosper ESG Bond
• The Charity Aid Foundation Bond, set up by the Retail Charity Bonds platform.

How do the Social and Green Bond markets compare?

There is no doubting that to date social bond issuance has substantially lagged that in green bonds. Last month Bloomberg New Energy Finance forecast that green bonds issuance is set to reach $134.9 billion by the end of 2017 (compared to $95.1bn of new issues in 2016), whilst social issuance remains in single digits.

Why is this the case?

Social bonds have various intrinsic features which may explain this:

• Size of capital requirement: A lot of social projects are focused on individuals and services for which the capital requirement is noticeably smaller; whilst £30m would represent a substantial amount for a social programme, £300m is the norm for a large renewable energy project. The exception to this may be affordable housing, which has enjoyed a strong run of recent issuance (as shown in the graphic below);
• Allied to this is a lack of aggregators who have the sophistication to bundle underlying social loans;
• Issuer appetite: the majority of organisations generating social benefit, particularly those with charitable status, do not have the balance sheet to support borrowing at scale;
• Thematic diversity: the range and mixed profile of project types creates complexity for an investor or ratings agents;
• Scope and reporting: A green bond’s purpose can be relatively neatly defined and measured (e.g. total carbon dioxide reduced, renewable energy capacity added) whereas social bond indicators are more likely to be bespoke and involve more complex assumptions around the baseline determination. This adds to the cost of issuing a labelled social bond.

Are there any signs that this may be changing?

As the IFC notes, a bond market aimed at financing projects with social issues has emerged and deepened, supported by the growing number of investors embedding ESG in their investment decisions. The Sustainable Development Goals (SDGs) is increasingly seen as a viable eligibility framework for the use of proceeds. New issues of green bonds are consistently over-subscribed and dedicated thematic bond funds are short of socially-aligned product against mandated thresholds.

Another factor has been the progress on standards. This summer the International Capital Markets Association (ICMA) agreed to turn the social bond ‘guidelines’ into its own set of Principles, separate from but mirroring the more established Green Bond Principles. These contain four pillars: use of proceeds, process for project evaluation and selection, management of proceeds and reporting. Critically, the Social Bond Principles state that “all designated Social Projects should provide clear social benefits, which will be assessed and, where feasible, quantified by the issuer.” IFG, as an experienced impact advisor, has become an observer to the Social Bond Principles and will look to share its expertise with the Working Group in the design of reporting frameworks and selection of indicators to ensure this is given substance and is consistent with wider market initiatives to standardise impact reporting.

Linking impact to yield

Ultimately the market will need to resolve the issue of whether the benefits of labelling a bond as social and committing to impact reporting justifies the time and costs involved.

The holy grail for us though goes beyond this and would see a direct link between the social outcomes being delivered and the pricing of the social bond. Encouragingly we have seen some examples recently across other debt securities where this linkage has been made explicit:

• HCT Group is a social enterprise providing transport services and community services raised a £10m package of financing; investor returns included an innovative social impact incentive feature, providing for a reduction in the borrowing rate if HCT met a pre-determined set of impact targets.

• Earlier this year, the technology company Philips signed an agreement for a EUR 1 billion loan with an interest rate that’s coupled to the company’s sustainability performance and rating. If the rating goes up, the interest rate goes down—and vice versa.

We would love to see more of this innovation!

Will Close-Brooks, Head of Structured Products