Social Bonds: What’s Next?

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As the outlook for the social bond market remains teeming with questions, Cédric Merle and Laure Madeleine presented their latest insights to provide some clarity on the future of the market.  

Following the onset of the Covid-19 pandemic, there was an incredible increase in demand for social bonds. As the market gained traction, total volumes issued grew by a staggering 1,253% from 2019 to 2021 (although with a gigantic base effect), and the number of new issuers grew five-fold. 

But just as the GSSS (Green, Social, Sustainability and Sustainability-Linked) and overall bond market experienced a slowdown in 2022, so too did the social bond market.  Yet, while issuances declined by 32% and volumes saw a 43% reduction between 2021 and 2022, the number of issuers and volumes remain higher than pre-Covid times, albeit with a penetration rate stagnating at around 5%. 

What makes the social bond market so unique? 

By nature, social matters are heterogenous and intertwined – that said, they can largely be defined by four key elements, particularly when it comes to identifying financing criteria:  

  1. Location (e.g.: disadvantaged areas, territories hit by extreme weather events) 

  1. Context or situations (e.g.: “ordinary” times versus emergency or crisis) 

  1. Project category and activities (e.g.: social housing, healthcare services) 

  1. Target population (e.g.: low-income or unemployed people)

Who are the main issuers?  

The market is extremely concentrated – much more so than the green bond market. For example, 65% of all issuances in the social bond market (from 2015 to 2023) were driven by just 3 issuers. To give some context, in the green bond market 72 issuers account for the same percentage of issuances.  

SSAs (supranational, sub-sovereign and agencies) – particularly supranational and government agencies – are the most prominent issuers, accounting for 52%. This may be attributed to their ability to mobilize significant amounts of capital in response to the market’s needs. Similarly, financial institutions (accounting for 45% of issuers) are significantly present in the market and also have the ability to deploy substantial financings, whereas corporates (3% of issuers), even those with social remit, are not that active. 

Which social matters are in focus? 

Under ICMA’s Social Bond Principles, there are 6 eligible social categories: Affordable basic infrastructure, access to essential services, affordable housing, employment generation, food security & sustainable food systems, and socioeconomic advancement & empowerment.  

SSAs, perhaps unsurprisingly, focus primarily on employment generation and access to essential services, which receive 47% and 38% of allocations, respectively. In terms of populations, the most recurrent are people “living below the poverty line” and “aging populations and vulnerable youth”.  

How cyclical and adaptable is the market?  

Social bond issuance volumes – at least for some issuers and use-of-proceeds categories – are largely linked to major events and economic or social cycles. That said, we did not see a swift reaction to the Ukraine war or the surge in global inflation, for example. There are several reasons for that inelasticity, the bulk of support to households or companies to soften inflation effects mostly consisted of fossil fuel subsidies. Although social by nature, such schemes are environmentally harmful and thus unwelcome in sustainable finance products, which increasingly try to articulate green and social impacts.  

Specifically for the Ukraine war, a large position of spending consists of weapons and military support, which does not fall into the social bond remit. The reconstruction phase and process for Ukraine to become a member of the European Union will require billions of euros investment which will be social bonds eligible, but it requires first the territory to be liberated and ceasefire. 

So, what’s next for the social bond market? 

Social bonds can help address a broad variety of issues: local or global, immediate or long-term, and those which encompass multiple topics – but as a result, they are less straightforward than green bonds.  Consequently, the market for social bonds remains restricted. Since 2015, while there have been more than 5,200 green bond issuances (all currencies included), only 796 social bonds have been issued.  

A lack of available supply in social bonds could be one reason for the limited number of social bond funds, as investors aim for portfolio diversity to reduce risk, and potentially the challenges related to social impact reporting may also be deterring some players to opt for social bonds. 

That said, issuances are likely to evolve in line with regulatory developments. While classification efforts on social matters are currently limited, and the proposal on an EU Social Taxonomy is still on hold, the growing importance of European directives on reporting (CSRD) and due diligence (CS3D) contribute to a better consideration of social issues. Social aspects can also be tackled through other fixed income instruments such as Sustainability-linked Bonds that encompass social KPIs. Since the emergence of the SLB market in 2019, 14 EUR SLB issuances incorporating social KPIs, accounting for 10% of the total SLB volumes, have been identified. This will inevitably grow as a result of the regulatory disclosure above mentioned.  

To find out more, read the report from Cédric Merle and Laure Madeleine:

and watch the replay "Natixis CIB Green & Sustainable Talks - Social Bonds"


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