Can social bonds drive social impact?
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Can social bonds drive social impact?

Nurse serving food to senior patient
Photo: Getty Images

Social bonds could help deliver the UN Sustainable Development Goals by driving private capital into essential services. But impact looks different from one place to the next, so how can issuers report it in a way that makes sense?

For Japan’s ageing population, senior-assisted living and care giving are now essential welfare services.

With bullet trains and plans for robot carers, the country’s big cities are often seen as beacons of technological and social progress. But for elderly people living in suburban or rural areas, access to medical care is difficult. Changing demographics are also affecting public transport requirements in rural areas.

Social needs like this are now a priority for the public budget: the Japanese government assigned about ¥36.9 trillion ($250 billion) of its annual budget to social security for this fiscal year. They are also driving issuance on the green, social and sustainability (GSS) bond market, particularly social bonds.

This ‘people first’ debt instrument is tied at the hip to the healthcare sector. When the Covid-19 pandemic struck, social bonds helped fund healthcare relief around the world. Issuance has risen from 3% of the annual sustainable total in 2017 to 7% in 2019 and 28% in 2020.

Today, however, social bonds are dwarfed by the green segment of the GSS bond market, and the product is struggling to keep up with market scrutiny on reporting standards.

According to the World Bank’s GSS bond market update published in January 2023, GSS bond issuance reached $948 billion in 2022, a 19% decrease compared with 2021, and social bonds saw the largest decline in volume, down 39% year on year in 2022.

Yet on the buy side, demand for social-labelled capital markets products that are aligned with the United Nations Sustainable Development Goals (SDGs) is resilient. Asset owners keen to demonstrate their commitment to responsible investing want to transfer some of their fixed-income allocation to social projects while protecting returns.

On the sell side, the multiplicity of social bond frameworks being published by banks also reflects an interest in the product.

This tendency to move everything under a responsible-investing banner comes with the expectation that the impact assessment mechanisms for climate finance that the market is so familiar with will work just as well for social finance.

However, the difficulty of formulating a single definition of social impact in practice or of pairing it with a standardized reporting methodology creates problems for issuers, their banks and the investor community.

Targets without data

So far, the market has opted to allow as much flexibility as possible to incentivize issuance. As a result, very little social impact is recorded or tracked.

“At our regional banking level, the short answer is that unless it’s a social transaction with specific integrated metrics, we don’t measure social impact,” one senior environmental, social and governance (ESG) bond market banker tells Euromoney.

If the social objective of the issuance is concise, then from the get-go the issuer will meet the first requirement, which is to have a sustainable objective
Isabelle Vic-Philippe, Amundi

Among those specific metrics is the number of beneficiaries reached by eligible projects. Today, the majority of social bonds use this as the main quantitative output indicator. It also serves as the backbone for any comparative study of the social bond market and how much impact it has on the global population.

Last February, for example, Japan’s National Institution for Academic Degrees and Quality Enhancement of Higher Education (NIAD-QE) issued a ¥5 billion social bond, the proceeds of which will fund equipment for advanced medical care and training, and will thus contribute to SDG 3 (good health and wellbeing) and SDG 4 (quality education).

According to the external review conducted by the Japan Credit Rating Agency, the chosen output indicators for this bond are the number of borrowers, the total loan amount and the amount of equipment installed. But quantitative indicators like this are less about the effect of the bond and more about its scope.

A lot of market participants recognize that these measurement tools aren’t very material.

“It’s much more difficult to measure impact and find relevant metrics beyond number of people benefitting – and even that is an imperfect metric because it tells you about reach more than impact,” says Amanda Vainio, head of sustainable finance for Europe, Middle East and Africa (EMEA) at MUFG.

Calculating the number of beneficiaries for a given project is one of few quantitative tools vetted by the International Capital Market Association’s (Icma) Social Bond Principles (SBP).

The SBP recommend the use of both qualitative and, where feasible, quantitative performance measures; and that issuers disclose the key underlying methodology and assumptions used in the quantitative determination, according to Icma’s June 2023 update.

It also specifies that social-bond issuers should explain how they define the target population of the bond.

There are other resources too, such as the Global Impact Investing Network’s Iris+ impact accounting system and the UN’s 169 SDG sub targets.

But are those recommendations really driving data collection? Social bonds tend to target a specific theme or SDG, such as education or gender equality. It seems obvious that the more specific the scope, the easier it will be to find relevant metrics.

With gender-focused bonds, for example, impact metrics include the number of loans to women-led microenterprises if the social bond is focused on micro-lending or the proportion of girls in schools for social bonds in the education sector.

Yet according to the Luxembourg Green Exchange’s May 2023 market study, only 5% of gender-focused bonds that follow the use of proceeds (UoP) model even report on impact metrics specific to women.

The report also finds that 77% of gender-focused bonds report having less than half of their proceeds allocated to gender projects, while over half of gender-focused bonds’ documentation does not explicitly refer to women as their target population.

Methodological issues

Even if issuers were more rigorous with their impact indicators, it is hard to see how a single set of metrics or single social impact definition could be applicable across different geographic and socio-economic contexts, especially if the bond targets several different SDGs.

For Amundi’s head of euro aggregate and lead portfolio manager, Isabelle Vic-Philippe, a key issue with impact reporting in the social-bond market is the complexity of developing methodologies that are analytically sound.

“For financing linked to social programmes according to the different SDGs, it’s complicated because you need to determine, through counterfactual scenarios, what would have happened if the capital had not been poured into that project,” she says.

Then there is the question of reporting on secondary or tertiary benefits. If the proceeds of the bond are financing a public mobility project for example, there will be a direct impact on access to affordable transport, but there may also be a secondary impact on access to basic health services or employment growth if marginalized communities feel more connected to urban areas.

Even with something straightforward like job creation, the impact isn’t the same if the project is in a city or in a suburban area
Tanguy Claquin, Crédit Agricole CIB

It then becomes even more difficult to prove whether or not the investment is responsible for this progress, especially given the fact that not all projects pooled into the bond will be the same.

Banks and asset managers are then left with a lot of descriptive material on all of these projects but limited comparable data.

“We are confronted with the limited comparability between the metrics that are available,” says Crédit Agricole CIB’s global head of sustainability, Tanguy Claquin. “Even with something straightforward like job creation, the impact isn’t the same if the project is in a city or in a suburban area.”

While the indicators look at the immediate output of the new investment, proving that the investment has had a positive and material outcome will require long-term study.

Public-sector issuers can rely on government resources for this.

When Japan’s NIAD-QE issued its social bond in February, it did so with the confidence that the assessment reports from Japan’s ministry of education, culture, sports, science and technology will track how the proceeds contribute to the chosen outcome indicators and impact targets: “education and training of healthcare professionals who will be responsible for future medical care” and “contributing to the development of clinical medicine and the improvement of the level of medical technology.”

That may be achievable for sovereign, supranational and agency (SSA) issuers, but expecting the same level of reporting from a corporate issuer may be wishful thinking.

Investor appetite

Before asking issuers to select the right indicators and provide a more thorough assessment of what contributions their assets have had to social development, capital owners need to figure out what they want from social bonds.

Asset managers know that labelled products are immediately popular with investors. Under public pressure to be seen as contributing to the SDGs, investors will be keen to add a story to their fixed income allocation if it guarantees a return.

From what we hear, a lot of institutional investors have clear categorization for environmental issues but not so much for social
Amanda Vainio, MUFG

Goldman Sachs Asset Management’s (GSAM) latest social bond survey found that nearly two thirds of investors (65%) surveyed currently allocate to social bonds or are interested in doing so; and many will have a preferred social theme, the most popular ones being affordable basic infrastructure and food security.

The now globally accepted principle of a just transition also makes it easier to include a diversity of assets under the sustainability labels, especially ‘social’.

“The general consensus is that the transition has to be done in a peaceful social context,” says Vic-Philippe. "You can’t ask people to make an effort on climate if they are struggling economically."

And like green bonds, social bonds are very simple from a regulatory perspective. If the objective is clear and the list of eligible projects for the proceeds follows Icma guidance, fund distributors will be able to include the bond in their universe confident that it will be in line with the EU’s Sustainable Finance Disclosure Regulation (SFDR).

“If the social objective of the issuance is concise, then from the get-go the issuer will meet the first requirement, which is to have a sustainable objective,” adds Vic-Philippe.

What the GSAM survey doesn’t show is how much detailed reporting investors expect.

“When we ask clients if they want to receive impact reports, they overwhelmingly say yes,” says Bram Bos, global head of green, social and impact bonds at GSAM. "But when we ask what kind of impact reporting they want to see, they are not always able to answer because there is still lack of standardization."

The fact that the market is still young accentuates this problem. Investors are happy to pour capital into Icma-certified bonds, but when faced with a structure that may not have been seen often in the market – which applies to a lot of social topics – they will struggle to categorize the allocation internally.

“From what we hear, a lot of institutional investors have clear categorization for environmental issues but not so much for social,” says MUFG’s Vainio. "And where there is more value, it may be more beneficial for issuers to go for a pure green product. Even a 90/10 split in a sustainable bond may pose the problem of internal categorization for some investors."

The middleman

As intermediaries, fund managers have been working with issuers to reflect investors’ aversion to social bonds that are a little too niche and where materiality is difficult to prove.

It is also in the manager’s interest to keep things simple. If issuers are constantly adding new social impact-related names to their bonds, like gender bonds, SDG bonds or education bonds, the market could get completely fragmented.

“We always ask issuers to first follow the social-bond principles and then decide if they want a more unique sub-category name like gender bond, which can be a second objective,” says Vic-Philippe.

Asset managers are also looking for metrics that best represent the entire portfolio of their social-labelled funds. If a large number of the bonds are focused on employment growth but only a few bonds include a niche key performance indicator (KPI) like unemployment rate by gender or age, it is unlikely to make it into the investor impact report.

“We depend on what the issuer can give us; the indicators that they found pertinent to qualify the social impact of their funding and the projects for the proceeds,” says Vic-Philippe.

And if investors don’t know what to ask for other than the number of beneficiaries – and since asset managers want to cast their net as wide as possible to grow the fund size – there is little incentive to push issuers for more ambitious reporting.

However, achieving a high level of granularity in social impact reporting may not be the priority for asset owners right now.

“What investors want is an investable product that returns a profit and broadly addresses a chosen social development goal,” points out one senior bond market banker.

There is also a diversification element. According to GSAM’s survey, the perceived shortage of products offering exposure to the market topped the list of investors’ concerns about market access.

At present, the social-bond market is dominated by SSA issuers that have the means to pool a number of projects that qualify for the UoP model. According to Icma data, SSAs account for 71% of total social bond issues to date.

For Amundi’s Vic-Philippe, the market size shows that social bonds are still popular.

“In the early days of the green bond market, the utilities sector dominated issuance and it took several years before other types of issuers came in,” she notes. "With social, we’re already seeing financial services coming in."

The comparison of today’s social bond markets to the green bond market of five or six years ago is not new, but others argue that with the green label there was a bigger push coming from investors for scientific rigour as climate-change awareness grew.

“We’re not seeing as much of that with social bonds yet,” says Bos.

And it will be harder for corporates to crowd the social-bond market, largely because of the difficulty in finding enough eligible assets.

“There aren’t that many corporates that would have enough UoP for social bonds of a good enough size for the market as a standalone,” says Vainio.

If corporate issuers’ main objective is to tap into the ESG appetite of investors, opting for a climate-related strategy is a lot more straightforward.

“Sometimes you see companies that have a big social angle to their business that still only issue pure green bonds because they don’t want to confuse the market, even though they would have projects eligible for social UoP; and that’s because some investors still have more advanced internal classification systems for green than social UoP categories,” Vainio adds.

As with the bond market’s climate journey, there may be an expectation that international frameworks and taxonomies will bring clarity to issuers of what makes a strong impact report for social-labelled products. But the inability to reconcile the fact that socio-economic development will look different from one local context to the next reduces the likelihood of anything beyond the current guidelines coming to market.

Perhaps what is more important at this stage is for borrowers to be transparent on what social cause they have chosen and why so that investors can match it to their preferences.

Calling that impact is a little premature.

Is social impact an SLB’s game?

If having enough projects eligible for social capital following a use of proceeds (UoP) model is tricky, issuers can always go for the sustainability linked bond (SLB) structure to target social impact.

After all, the SLB structure was created to address a key weakness of the UoP model: that it doesn’t incentivize the issuer to establish a holistic transition pathway for its enterprise and not just raise capital to finance a certain product.

And if the SLB structure can address the trajectory of the entire organization towards a more sustainable future, it can certainly include social progress as part of that trajectory.

In fact, banks pride themselves on being able to convince clients to integrate social targets in SLB structures. During Euromoney’s Awards for Excellence review a lot of big deals that included social key performance indicators (KPIs) – such as Anglo American’s €745 million bond with a job creation KPI and Shiseido’s five-year ¥20 billion SLB, which includes a female representation KPI – were used as selling points by candidates in the environmental, social and governance (ESG) categories.

Finding a balance

In many ways, SLBs can bring the additional flexibility that both issuers and investors are looking for to be able to target different versions of sustainable impact.

“Corporate SLB issuers have the possibility to target different material ESG topics relevant for them, without having to pool as much capital into a set of projects,” says Amanda Vainio, head of sustainable finance for Europe, Middle East and Africa at MUFG.

But looking at the SLB market as a whole and the preferred choices of KPIs among issuers, the overwhelming majority of targets are climate related. Currently, 90% of the KPIs defined by SLBs are aimed at environmental objectives, according to the Luxembourg Green Exchange.

However, this absence of social metrics in SLB issuance has more to do with regulatory scrutiny than intent.

Until recently in Europe, SLBs that have step-ups were not eligible to be purchased by the European Central Bank through the Pandemic Emergency Purchase Programme or the Corporate Sector Purchase Programme because of the coupon pricing risk.

And when the ECB changed the policy in 2021, the bank only included environmental sustainable development goals (SDGs) as part of what could be included in coupons for SLBs, mostly because the environmental objectives of the EU are clear, while there is no update on its social taxonomy.

Public opinion

And then there is the greenwashing angle. A lot of scepticism around SLBs relates to the fact that the KPIs lack materiality and that the step-ups and step-downs are not financially impactful enough to ensure that the issuer will work towards meeting its sustainability objectives.

With more people looking into the fine print of SLB issuance, evidence that some of these bonds lack materiality has begun to surface. The bad press may have discouraged some impact investors from buying SLBs, but it has also deterred issuers from coming to market prematurely.

“It’s not necessarily a declining interest in the product itself, it’s just that issuance is slower because the due diligence has been lengthened,” says Vainio.

Others think the crisis of confidence in SLBs is an opportunity for social debt instruments.

“I share the concern on the SLB market and the lack of materiality,” a senior asset manager tells Euromoney. "In general, I think people like the concept, but the reality is that some questionable issuers came into the ecosystem and they tarnished the product’s reputation."

The International Capital Market Association has published a registry of 300 KPIs for market participants, which is good news for SLBs. But the UoP model is a well-liked product and investors appreciate the clarity that comes with it.

And in the meantime, adopting a UoP structure may be the safer bet.


Gros, Marianne.jpg
Sustainability and ESG senior reporter
Marianne Gros is sustainability and ESG senior reporter. She joined Euromoney in 2022, having previously covered asset allocation news in the European institutional investment space.
Gift this article