Social bonds raised $147.7bn (£111.4bn) in 2020 – more than seven times the $20bn figure in 2019. But is the trajectory likely to continue?
BNP Paribas Asset Management ESG analyst, sustainable fixed income lead Malika Takhtayeva believes the massive increase in money raised underscores their appeal as a potentially significant force for effecting social changes such as making more affordable housing available, improving access to essential services and creating jobs.
NN Investment Partners lead portfolio manager green bond Bram Bos says there is clear evidence to show that the appetite for social bonds is far from waning. “In 2021 year to date, we have seen issuance in social bonds of $224bn. The trend is continuing, and we expect ongoing growth in the social bond market in the years ahead.”
What factors may come into play to boost social bond interest? For instance, will regulation in the shape of EU’s social taxonomy; and SFDR increase investor confidence in the social bond market and boost capital flows towards these bonds?
Bos says that currently, the EU and SFDR’s main emphasis is on green activities. “We do expect more focus on social issues and social bonds in the future with the development of an EU social taxonomy, but this will take years before it will be at a similar level as the EU green taxonomy.”
Carmignac stewardship director Sandra Crowl takes a similar view. She says that creating a list of eligible business activities that contribute positively to society is clearly a move forward and will help discern the extent with which bond issuances finance social based projects and will increase investor confidence creating higher demand and cheaper financing for companies.
“Just like the environmental taxonomy however, investors must still embrace those issuers that are transitioning, and for the short term socially aligned bonds may be in short supply. The social taxonomy will still take some time to be implemented with further industry consultation and a three-month ratification process in the EU Commission, Parliament and Council.”
Gender equality
Social bonds can be an effective tool in promoting gender equality, according to Takhtayeva at BNP Paribas. She points out that the economic fallout from the pandemic has increased gender inequality, especially in terms of pay gaps and workforce participation. According to the UN, the pandemic has caused 25% of self-employed women to lose their jobs compared to 21% of men.
“There are unrealised economic benefits from narrowing and closing gender gaps. A higher share of women in paid employment can lift economic output, while an increase in women’s incomes can boost consumption and household finances. Employing more women can help offset the negative effects of population ageing.”
Takhtayeva references a recent study by McKinsey which presents a scenario where women participate in the global economy on the same level as men and this could increase annual global GDP by $28trn.
In terms of social bonds directly related to gender equality, Takahtayava namechecks IDB Invest issuing a $122m bond in Mexico to fund projects advancing gender equality and women in Latin America and the Caribbean.
Also, Banco Davivienda issued Latin America’s first gender-focused social bond in August 2020 to fund loans to eligible women-led businesses in Colombia and to first-time female home buyers on low incomes.
Gender equality is goal five of the UN’s Sustainable Developed Goals but do social bonds play a broader role in helping to achieve the UN’s aims?
Bos certainly thinks so: “Both investors and issuers want to emphasise what is important to them and make sure they do good. We think by investing in social bonds, investors will get exposure to 10 sustainable development goals, which they would not get exposure to if they would invest in green bonds.”
He adds that though the social bond market was more or less non-existent before 2020, he thinks that social bonds are an ideal tool to help investors target capital towards social projects. “Social bonds also give investors more transparency. In our view if a company (or issuer) issues a social bond they are giving an investor tangible proof of what they are doing and how the investor’s money is being used.”
Pandemic effect
Covid-19 has sped up the growth of social financing, according to Takhtayeva. “Since the beginning of 2020, social bonds have seen an uptick in issuance volumes as the public sector and development agencies turned to debt financing in response to the impact of Covid-19.”
She adds: “Pandemic relief efforts have increased the number of social bonds focused on issues such as tackling unemployment and access to healthcare. For example, in May 2020, Unédic, the French unemployment agency, issued a €4bn social bond followed by a second €4bn bond a month later”.
Bos reiterates the point regarding the pandemic factor. “Clearly after the pandemic crisis started in Q1 2020 the growth strongly picked up and made investors aware that next to tackling climate issues through green bonds, there is also a possibility to address social issues through social bonds.”
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