A Pandemic-Driven Surge In Social Bond Issuance Shows The Sustainable Debt Market Is Evolving

During the past few months, the COVID-19 pandemic has dragged countries around the world through a period of economic disruption, the depths of which have not been seen since the Great Depression. Increased unemployment, rising fatality rates, and strained health care systems have placed a spotlight on a future fraught with social risks. In parallel, corporations and financial institutions have been looked to for leadership in addressing these unforeseen challenges. This call for a greater focus on mitigating social risks has spilled over into the capital markets, particularly through the rapid rise of social bond issuance, which has more than quadrupled so far this year, even as credit conditions have weakened sharply.

Social bonds, which finance projects with primarily social objectives, have emerged as an unlikely tool in the economic fight against the virus to address the demands of consumers and communities that are increasingly aware of current social issues. The growth of social bonds is outpacing that of green bonds, portending a pivot away from a historically climate-centric sustainable debt space and reflecting a diversification of sustainability objectives financed by investors. And, while the recent surge may have been precipitated by COVID-19, the appeal of social bonds as a sustainable finance instrument may endure long after its effects have subsided.

In response to this recent proliferation of social bonds, the International Capital Markets Assn. (ICMA) updated its Social Bond Principles (SBPs) in June 2020 to include an expanded list of social project categories and target populations. We believe the updated principles could encourage greater issuance of social bonds, potentially leading social bonds to emerge as the fastest-growing segment of the sustainable debt market in 2020. In our opinion, as this trend continues, social bond reporting and disclosure practices will gain importance particularly as concerns around “social washing”–when an issuer misrepresents the social impact of its financed projects–grow in the investor community given the challenges of tracking the impact of social bonds. This challenge is compounded by the fact that benefits are often more qualitative than quantitative. We believe the updated SBPs could be a key step in addressing these risks. Yet many social bonds issuers do not follow the governance and reporting practices ICMA recommends, so we expect improvements in tracking and disclosure could be relatively slow. Nonetheless, echoing the growth of the green bond market, as social bond issuance picks up, we anticipate market demand for transparency will grow and social bond impact reporting will be imperative to developing a harmonized social bond market.

Social Bond Issuance Has Reached Record Levels

ICMA defines social bonds as bonds whose proceeds fund new and existing projects with positive social outcomes such as improving food security and access to education, health care, and financing. They constitute a relatively small part of the overall sustainable debt market, which also includes green bonds, sustainability bonds, green loans, and sustainability-linked loans and bonds. Of the $400 billion in sustainable debt issuance in 2019, according to the Climate Bonds Initiative (CBI), social bonds made up approximately $20 billion, or 5%.

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