Financing Social Change Through Social Bonds
The article below is from our BRIEFINGS newsletter of 17 June 2019
Amid the growth of environmental, social and governance (ESG) investing, the private sector is increasingly looking to harness capital markets to finance positive social outcomes. Earlier this month, Goldman Sachs hosted a roundtable in Paris with investors, issuers and ratings agencies to discuss the opportunities and challenges in the nascent social bonds market. We sat down with Goldman Sachs’ Ivan Fillon, Kathleen Hughes, Marc d’Andlau and Kyung-Ah Park to discuss the takeaways from the event.
First, what is a social bond and its role in the capital markets?
Ivan Fillon: Social bonds are essentially bonds that are exclusively used to finance eligible projects that have positive social outcomes. Unlike green bonds — whose proceeds are earmarked for climate and environmental projects — social bonds raise funds for a broad range of projects that result in positive social benefits, ranging from projects that aim to improve access to health care, education and affordable housing, to initiatives that create jobs or revitalize economically depressed areas. For example, late last year Goldman Sachs advised Groupe BPCE, France’s second-largest banking group, on its inaugural €1.25 billion social bonds to provide financing to small businesses and nonprofits focused on local economic development in underserved areas of France. From a capital markets perspective, primary issuance of social bonds is relatively limited – just as green bonds were several years ago – given that the market for social bonds is relatively new. Indeed, having a diverse range of issuers, including corporations, issuing social and sustainability bonds will be critical to creating a deep and liquid market.
What are the factors driving interest in social bonds?
Kathleen Hughes: In recent years, companies have taken on a more active role in using their influence and resources to drive and promote social change. Part of that stems from the pressure they face from their investors, clients and customers, and their employees to be good corporate citizens. In our investment management business, for example, our clients are asking us to engage with companies that fail to integrate ESG practices into their businesses. Meanwhile, being ESG friendly also provides a competitive advantage for companies – whether it’s in capturing growth and innovation, driving change in their supply chain, or aligning capital raising and investment with ESG. It also helps employers attract top talent since many millennials often prefer to work with socially responsible and mission-driven companies.
What is likely to promote – and hinder – the development of social bonds?
Marc d’Andlau: The growth of green bonds has paved the way for social bonds, which is benefiting from increasing demand for ESG assets more broadly. Having said that, from an investor perspective, the impact of social bonds is more difficult to measure and quantify given the breadth of social projects, and the complexities around the target populations and market segments. By comparison, green bonds have more specific quantifiable metrics, such as greenhouse gas emissions targets. We have seen some recent efforts to provide an investment framework around social bonds. The International Capital Market Association’s Social Bond Principles, for example, provided high-level categories for eligible social projects, while also promoting guidelines around transparency, disclosure and reporting to help facilitate the tracking of funds into social projects. But there’s still more work to be done to create transparency around social bonds and, more broadly, ESG ratings and standards.
What does the future look like for the social bonds market?
Kyung-Ah Park: Despite some of the hurdles that Marc touched upon, we’re seeing greater appetite by market participants to allocate capital to social projects and sustainability initiatives. For example, global social bond issuance increased by 41% to $11.1 billion in 2018, while industrywide issuance of sustainability bonds (which include both environment and social benefits) increased by 38% to $13.7 billion over the same period, according to Bloomberg New Energy Finance. More broadly, we’re also seeing efforts to demonstrate that returns of financial instruments are linked to ESG performance indicators – which is a sign of the evolution and growing sophistication of the market. Integrating ESG into companies’ core business strategies – and showing how doing so drives financial resiliency and improved credit ratings -- will be an important step in the market’s evolution.