- Social bond issuance reached nearly $200 billion last year, from a little over $10 billion in 2019.
- These bonds can tackle societal inequities like financing affordable housing or lending to women-owned businesses.
- This article is part of the "Financing a Sustainable Future" series exploring how companies take steps to set and fund sustainable goals.
For people in banking and finance, the subject of social bonds can induce mixed feelings. Investors may feel good about knowing their money is going to worthy causes, while skeptics wonder whether this debt is another way for companies to present as good corporate citizens.
Conflicting opinions aside, there's no doubting the numbers. Social bonds, which support initiatives like affordable housing or women-owned businesses, have soared since the global pandemic has encouraged companies to help tackle societal inequalities. Roughly $192 billion worth of social bonds were priced globally last year, on top of $165 billion in 2020, according to Refinitiv data supplied to Insider. Before that, social bonds barely registered above $10 billion a year, the data showed.
"The applicability of the social bond has come to shine in dire circumstances. And the pandemic has definitely helped kick that off," Esohe Denise Odaro, the International Finance Corporation's head of investor relations and sustainable finance, told Insider. "It takes real-life situations to educate people as to how to use it."
The IFC played a big part in social bonds, both as an investor and an issuer.
Last month, IFC invested in sub-Saharan Africa's first-ever gender bond by Tanzania's NMB Bank. The $32 million deal got a $10 million anchor investment from IFC through its Banking on Women business initiative. Proceeds from the issuance — dubbed a 'Jasiri Bond' — will finance more than 2,000 women-owned small businesses in Tanzania.
Back in January, the multilateral bank issued its own CA$500 million ($384 million) social bond to support low-income communities, women entrepreneurs, and small businesses in emerging markets.
The emerging framework for social bonds
While social bonds have taken off, they're still in their infancy, especially compared to mature ESG debt instruments like green bonds, which debuted a decade ago. For issuers, determining what can be classified as a social project can be confusing, and sometimes expose companies to extra scrutiny from market experts that will ensure these issuers come good on their social promises, Odaro said.
"A lot of businesses are set up as an enterprise, not a social enterprise," Odaro said. "There's this fear of putting a spotlight on your business through issuing a social bond. And if your company's strategy is not going in the right direction, you're opening yourself up to a lot of market scrutiny."
That fear, in part, comes from the reporting that social-bond issuers need to complete to ensure the proceeds from the bond are going to where they're intended.
For example, the IFC's Social Bond Fact Sheet comprises strict lending requirements to women-owned businesses or lending to projects that meet the criteria outlined in the Social Bond Principles.
The Social Bond Principles, defined by the International Capital Markets Association, require issuers to keep an up-to-date list of projects where the proceeds will go. The borrowers also need to update this information on an annual basis.
It's early days for social debt instruments, and while there will be inevitable growing pains, they're proving to be ideal for issuers at the earlier stages of their ESG journeys because of their simplicity.
Unlike sustainability-linked bonds, which allow issuers to put the proceeds to an array of needs, social bonds are ring-fenced for a specific objective, which can make the educational process much easier for the issuer and investor.
Not only is this ideal for the issuer, but investors can take comfort in knowing that the bond's proceeds are allocated toward initiatives that meet social bond frameworks.
"Social bonds are better suited to early-stage ESG adopters," Odaro said. "And if you're concerned about the use of proceeds, you don't have to have too big of a concern because of the explicit restrictions that proceeds go toward pre-determined projects."