Social bonds grow but remain in shadow of green

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While green bond issuances topped $200 billion in 2019, social bonds are yet to experience the same momentum.

According to Dealogic data, issuances in Europe in 2019 have come in at €8.7 billion ($9.6 billion), an increase on 2018’s €6 billion ($6.6 billion). Nearly €5 billion of this comes from banks, which is more than double 2018 volumes. Others have included French manufacturing company, Danone, who issued a €300 million ($368.5 million) bond in April.

"The market focus is on green bonds," said Lars Mac Key, head of sustainable bonds at Danske Bank. "Social bonds have seen an uptick, but from smaller numbers. The social bond principles are not as well-known nor as well-used as green bonds."

Social bonds are the one of the newer kids on the sustainability block. They’ve been championed by organisations such as the International Capital Market Association (ICMA), whose various principles for green, social and governance bonds are recognised across the market.

ICMA’s principles define social projects as activities and investments that 'directly aim to help address or mitigate a specific social issue and/or seek to achieve positive social outcomes especially, but not exclusively, for target population(s)’.

Social projects are broad by definition. It could be affordable basic infrastructure, such as access to clean water, or access to essential services like education.

Affordable housing projects and employment generation – such as SME financing – have been strong themes in Europe.

The latter was the basis for the first social bond issued in 2015 by Spanish bank, Instituto de Credito (IOC). The purpose of the transaction was to help finance SMEs in economically depressed regions of Spain that generated lower GDP per capital than national average.


  • Social bonds are gaining investor interest, but remain far behind green and sustainable bond issuances;
  • Experts in the field fear a lack of standardisation for the product will leave it left behind;
  • 2019 issuances in Europe have come in at 8.7 billion EUR, an increase on previous years.

"While social bond issuance has taken off since the publication of the Social Bond Principles in 2017, volumes are still well below those in the green bond market," said Nicholas Pfaff, managing director at the ICMA. "We see considerable dynamism in the related sustainability bond market, where issuers combine green and social projects in line with the Sustainability Bond Guidelines also released in 2017."

Pfaff continued that he expects the combined social and sustainability bond market to exceed $50 billion in 2019.

Since 2015, social bonds have had particular success in Spain due to the initiative of the state-owned IOC and private bank, Kutxabank, which issued a social bond with the intention of subsidising housing for low income residents of the Basque region in the same year.

Read more: ESG: Asset managers vary in enthusiasm

2019 has seen an uptick in usage further afield in Europe, such as a social housing initiative in Iceland that was listed on Nasdaq. In November, the Royal Bank of Scotland sold the UK’s first social bond. The deal is targeted at reducing regional inequality by lending to SMEs in deprived areas of the UK.

"This social bond demonstrates our commitment to addressing regional inequality and promoting economic growth by supporting businesses to create and retain jobs in some of the UK’s most deprived areas," said RBS chief executive, Alison Rose. "There was strong demand for this bond, with institutional investors increasingly targeting socially useful lending and opportunities to track and measure the impact of their investments."

"It has been an aspiration of ours to evolve the issuance of liabilities to match developments in the sustainability sector," continued her colleague, Scott Forrest, head of capital strategy. "Sustainability as a whole has been at the heart of our work at RBS for many years, with some programmes having run for over two decades."

"Whether this market is a success will depend on investor appetite for such products and the willingness of financial institutions to engage with them," said Clifford Chance partner Paul Deakins, who advised RBS on the deal.

Deakins explained that market participants have to take a principles-based approach in this area due to a lack of regulation.

"We are seeing market participants innovating and defining their own conventions," he added. "Social bonds to date have followed a similar framework and set of principles to those already used for green and blue bonds. They can help tackle regional inequalities in terms of unemployment and job creation."

To drive efficiency, BBVA credit research analyst, Michael Gaynor, said that many banks are instigating their own sustainability frameworks (as RBS has done) to work as a template, regardless of if they are green, blue, social or governance impacting.

"Timing is an issue. We’re still arguing about what qualifies as green, so defining social will potentially take even more time"

However, he warned that social bonds risk being left behind in the ESG rush, with European focus predominantly on environmental causes.

"While we have standards in place for green bonds and momentum with that, what we are lacking is concrete suggestions, such as those that the EU technical expert group has offered on green," he said. "Timing is an issue. We’re still arguing about what qualifies as green, so defining social will potentially take even more time."

There are also issues from a practical perspective, as outlined by Forrest when discussing RBS' issuance. 

"From a structuring side, social bonds definitely have more challenging aspects than green bonds," he said. "Going down the SME route as we did, you’re looking at a much larger pool of assets with lower loan amounts compared with traditional green projects."

"One issue that we face is that there is no pre-defined methodology on what eligibility is," he added. "We had to innovate and come up with a structure that measured our lending to deprived areas as redressing geographical inequality is something we feel passionate about."

This sentiment was echoed by Deakins. "The market needs to coalesce around a particular viewpoint if there is a desire for a more standardised product," he said. "Given the breadth of objectives, this has the potential to be politically challenging."

Author: Jimmie Franklin | Published: 5 Dec 2019

This article was first published in IFLR here.

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