Investing in social bonds: factors and benefits
Thursday 03 October 2019
News, Fixed income
Over the past years, the global investor community continued to integrate risks related to climate change into investment decision making. Such a level of mobilization has yet to materialize for the consideration of social risk.
Social risk can be associated with increasing income inequality, which is intrinsic to economic and financial stability as well as a hurdle for the global progress needed to address climate change. The recent economic growth episode from the 1980s improved the situation for the poorest half of the population, especially in emerging countries.1 However, the lion’s share was taken by the top 1%, leaving nothing on the table for the middle class and an outstanding issue needing to be addressed.
At the macro level, income inequality can potentially affect an investor through three channels. Inequality is an obstacle to economic growth,2 it reduces social, economic and institutional resilience to shocks,3 and it is a good measure of socio-political instability that can end up affecting also the financial system.4 At the micro level, a potential threat to investment performance originates from a company’s reputational and regulatory risks due to, for instance, labor rights and equal pay infringements.
Despite the fact that this investment rationale is still in development, investors can already position themselves on this issue. Investors can implement dedicated engagement strategies targeted to encourage corporates to align their practices with global goals related to social issues. Going a step further, investors can apply a filter to their assets to invest only in corporates with best social practices. Finally, investors can also invest in dedicated financial instruments, such as social bonds, aimed to finance social projects while providing a solid platform for direct engagement with the issuer.
Investing in social bonds is a good starting point for responsible investors to actively engage with corporates and encourage them to orient their balance sheets and their business models towards socially impactful products and services.
The Social Bonds market is growing
A social bond is a regular bond that exclusively finances projects creating a positive social impact for one or more target populations. Both aspects are necessary for a bond to be defined as social.
In 2017, the International Capital Market Association (ICMA) published the first guidelines for issuing a social bond, with the objective of framing the debate and of supporting the development of this innovative financial instrument. The Social Bond Principles (SBP) list examples of project categories (e.g. access to the health system) and of target populations (e.g. people living under the poverty threshold) and promote high transparency.
Social bonds issuances have seen a 7-fold increase from 2014, reaching almost 28 billion dollars at the end of 2018.5 From a geographical perspective, Europe is leading the way accounting for more than 60% of the issuances, with a strong representation of Spain and the Netherlands. Among project categories, affordable housing, support to SMEs and access to health account for half of the allotted funds.6 Year to date, 46% of the volume has been coming from sub-sovereign issuers, such as local authorities, but corporates have begun entering the space, encouraged by Danone’s 300 million euros social bond, the first issued by a multi-national enterprise.
The market is expected to continue growing in the following years. A contributing factor will be the increasing adoption of the UN Sustainable Development Goals (SDGs) as a framework to identify potential investment impact. The Social Bond Principles’ project categories are clearly aligned with several SDGs, for instance “good jobs and economic growth”.7
The increasingly important consideration of ESG standards in the investment decisions of a growing number of investors will push the demand for a social bond market” (Jingdong Hua, Vice-President and Treasurer at the World Bank)
The purpose of a social bond
Social bonds provide benefits similar to green bonds for both issuers and investors.
On one hand, for issuers, social bonds are a good opportunity to diversify their investor base by including buy-and-hold investors. Moreover, issuing a social bond could also help in enhancing the company’s reputation and attractiveness towards its stakeholders and thus, eventually, in obtaining lower long-term financing costs and positive repercussions on the share prices. However, evidences are scarce and differ case-by-case.
On the other hand, investors are able to ring-fence their financing to corporates with clear social objectives. More, the social impact is free: as with green bonds, the risk-return profile of a social bond is the same as that of a vanilla bond from the same issuer. Lastly, the required reporting increases the transparency of the use of proceeds and reduces the likelihood of “impact washing”.
Amundi is strongly committed to innovating for sustainable finance and has a deep record of accomplishment in fixed income solutions. With that in mind, Amundi will launch its first Social Bond Fund before the end of the year, using the UN SDGs as a framework to guide impact analysis.
 World Inequality Database (WID). Available at:
 Growth and inequality: a close relationship? (OECD, 2014). Available at: http://www.oecd.org/economy/growth-and-inequality-close-relationship.htm
 Overview Paper on Resilient Economies and Societies (OECD, May 2014). Available at: https://www.oecd.org/mcm/C-MIN(2014)7-ENG.pdf
 Income distribution, political instability and investment (A. Alesina & R. Perotti, October 1993)). Available at: https://dash.harvard.edu/bitstream/handle/1/4553018/alesina_incomedistribution.pdf
 Climate Bonds Initiative and Environmental Finance database, as of 31/12/2018
 Osons les social bonds! (PwC & ORSE, January 2019). Available at : https://www.orse.org/nos-travaux/osons-les-social-bonds
 Green, Social and Sustainability Bonds – A high-level mapping to the Sustainable Development Goals (ICMA, June 2019). Available at: https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/June-2019/Mapping-SDGs-to-Green-Social-and-Sustainability-Bonds06-2019-100619.pdf
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