Forget vanilla products – social bonds might be the flavour of the year for fixed-income investors.
According to Goldman Sachs Asset Management (GSAM)’s social bonds survey, Investing in Inclusive Growth, nearly two-thirds of investors are investing in social bonds or are keen to do so. At year-end 2022, the social bond market stood at €464 billion, roughly a third of the green bond market.
The Goldman Sachs Social Bond Fund was launched in June 2022, and now stands at €73 million AUM. It is benchmarked to the iBoxx EUR Investment Grade Social Bonds Index.
According to the Goldman survey, investors see the risk-return profile and credit quality as broadly similar between the social bond and wider markets, so swapping between the two is “low hanging fruit” for any asset owner looking to do some good.
So why are investors not switching more of their fixed-income allocation to social bonds?
Read the fine print
Social bonds are, correctly, fully described as social impact bonds. That ‘impact’ part has no definition and little meaning.
They follow a use-of-proceeds model, but investors want to know more than simply where those proceeds are headed. They need reports with evidence that some sort of impact is being achieved.
And even GSAM cannot collect data that does not exist. It is difficult to quantify social progress beyond the number of beneficiaries, and the social bond issuers themselves do not have much impact-data to offer up as evidence either.
There have been some efforts made by the market to standardize social-impact reporting, most notably the International Capital Market Association’s (ICMA) Harmonised Framework for Impact Reporting for Social Bonds. But the market needs a uniform social-impact database, which could give a better view of what is being achieved.
The GSAM survey shows that lack-of-product transparency and social washing are among the main reasons why investors are not (yet) allocating to social bonds.
Asset managers will not invest in social-impact labelled products if there is no guarantee that the impact is there. Until that time, they will probably stick with vanilla.