Social bonds are on the rise, but issuers and investors are still learning the merits
- Social bond issuance reached nearly $200 billion last year, up from just over $10 billion in 2019.
- These bonds can address social inequalities such as financing affordable housing or lending to women-owned businesses.
- This article is part of the “Financing a Sustainable Future” series exploring how companies are taking action to set and fund sustainable goals.
For players in banking and finance, the subject of social ties can induce mixed feelings. Investors may feel good knowing that their money is going to worthwhile causes, while skeptics wonder if this debt is just another way for companies to present themselves as good corporate citizens.
Conflicting opinions aside, the numbers are unmistakable. Social bonds, which support initiatives such as affordable housing or women-owned businesses, have exploded since the global pandemic encouraged companies to help tackle social inequality. About $192 billion in social bonds were valued globally last year, on top of $165 billion in 2020, according to Refinitiv data provided to Insider. Before that, social bonds were just over $10 billion a year, the data shows.
“The applicability of social connection has proven in difficult circumstances. And the pandemic has certainly helped trigger it,” Denise Odaro, head of investor relations and sustainable finance at the Financial Corporation, told Insider Esohe. international. “It takes real situations to educate people on how to use it.”
The IFC has played an important role in social bonds, both as an investor and as an issuer.
Last month, IFC invested in Sub-Saharan Africa’s first-ever gender-linked bond by Tanzanian bank NMB. The $32 million deal secured a $10 million seed investment from the IFC as part of its Banking on Women business initiative. Proceeds from the issue – dubbed “Jasiri Bond” – will fund more than 2,000 women-owned small businesses in Tanzania.
Last January, the multilateral bank issued its own C$500 million ($384 million) social bond to support low-income communities, women entrepreneurs and small businesses in emerging markets.
The emerging social bond framework
Although social bonds have taken off, they are still in their infancy, especially compared to mature ESG debt instruments like green bonds, which debuted a decade ago. For issuers, figuring out what qualifies as a social project can be confusing and sometimes exposes companies to scrutiny from market experts who will ensure those issuers deliver on their social promises, Odaro said.
“A lot of businesses are started as a business, not a social enterprise,” Odaro said. “There’s this fear of spotlighting your business by issuing a social bond. And if your business strategy isn’t going in the right direction, you’re exposing yourself to intense market scrutiny.”
Part of this fear stems from the reports that social bond issuers must complete to ensure that the proceeds of the bond go to their destination.
For example, the IFC’s Social Bond Fact Sheet includes strict lending requirements for women-owned businesses or loans to projects that meet the criteria set out in the Social Bond Principles.
The Social Bond Principles, defined by the International Capital Markets Association, require issuers to maintain an up-to-date list of projects to which funds will go. Borrowers must also update this information on an annual basis.
Social debt instruments are still in their infancy, and while there will inevitably be some growing pains, they are ideal for issuers in the early stages of their ESG journey because of their simplicity.
Unlike sustainability bonds, which allow issuers to allocate proceeds to a range of needs, social bonds are earmarked for a specific purpose, which can make the educational process much easier for both the issuer and the investor.
Not only is this ideal for the issuer, but investors can take comfort in knowing that bond proceeds are being directed to initiatives that adhere to social bond frameworks.
“Social bonds are best suited for early-stage ESG adopters,” Odaro said. “And if you’re concerned about revenue usage, you don’t have to worry too much because of the explicit restrictions that assign revenue to pre-determined projects.”