Pandemic fuels rise in social impact investing

Green bonds have given investors opportunities to finance a variety of environmental projects. Now the burgeoning social bond market is doing the same for a range of projects that could improve social outcomes around the world

Concerns about climate change and the need to reduce carbon emissions have helped the green bond market grow to $1.2tn; the coronavirus pandemic might have a similar impact on the growth of the social bond market. Last year, social bond issuance hit $257bn, according to Climate Bonds Initiative data—more than four times what had been issued in the previous 14 years combined.

“The Covid-19 pandemic was a social crisis which broadened investor’s attention from seeking just positive ‘environmental’ outcomes from their investments, to encompass some of the social impacts of the pandemic, such as health, education and employment, which are all social elements” says Simon Bond, executive director of Columbia Threadneedle Investments’ responsible investment portfolio management, where he manages the Threadneedle UK Social Bond Fund.

“Where we used to think in terms of the ‘E’ and the ‘S’ of ESG as being almost separate, you really shouldn’t separate the two—if we get the environment wrong, it’s going to create some of the worst social consequences. We need to make sure that the cost of that transition is not borne by those in society least able to afford it.”

While the broader sustainability debt market has seen a growth in the flavour of bonds—such as sustainability-linked bonds (where interest payments are linked to certain ESG targets), blue bonds (which finance ocean-related sustainability projects) and transition bonds (which help borrowers fund their transition to a low-carbon economy)—the social bond market is also seeing a wave of innovation.

“Covid-response bonds were developed out of what were originally green and social bond principles and sustainability bond guidelines, but they target the clear and present danger of the health crisis,” says Bond.

Bond has also been involved with the International Capital Markets Association’s Social Bond Principles Working Group, which is seeking to encourage new bonds to finance social projects.

“We recently focused on encouraging the issuance of gender bonds, which invests in women-led businesses or initiatives promoting women in the workplace,” he says. “This is what the Threadneedle UK Social Bond Fund is all about, trying to focus on additional benefits for society and on inequalities and deprivation, while also providing returns for investors.”

That focus on channelling cash to projects in underfunded areas is something that the UK’s green gilt programme is also supporting.

Covid-response bonds were developed out of what were originally green and social bond principles and sustainability bond guidelines, but they target the clear and present danger of the health crisis

“This is pushing boundaries in terms of where you can go with green bonds, because it encompasses the concept of social co-benefits,” says Bond. “So 100% of the money is going to go into green infrastructure and green projects, with the co-benefit of creating things like green jobs and social benefits in deprived areas.”

Bond says it is vital that the market develops products that deliver on their promises so there is no risk of ‘social washing’—the social equivalent of greenwashing. One initiative Bond is working on is to ensure use-of-proceeds bonds—where the cash is earmarked for a specific purpose—don’t just fund the projects, but actually make a difference to the target population. This means ensuring ‘confirmation’ as well as ‘verification’.

Given the market remains in its relative infancy, Bond is aiming to ensure Columbia Threadneedle helps set the standard for benchmarking social bond impact.

“One of the things we look at within our fund is this concept of social intensity, or the value of the benefits,” says Bond. “Within sustainability markets there has been the development of a common language that tends to reference the United Nations’ Sustainable Development Goals (SDGs). We map every bond in the portfolio to its primary SDG using the 169 targets that underlie the 17 SDGs. These standards are much more granular.”
In the future, Bond believes the potential impact of social bonds will be measured by ‘ABC’ categorisation used by the Impact Management Project.

“This is ‘A’, act to avoid harm; ‘B’, benefit stakeholders; and ‘C’, contribute to solutions,” he says. “Again, we are mapping every bond we have in the portfolio to those classifications. We’ve translated what we’re doing in the fund into a common language for sustainability and impact, so you can start to compare what we’re doing with other asset classes and with other funds. That is something that needs to be developed equally.”

The market also needs to establish a social taxonomy to improve consistency and make it easier for investors to understand what they are buying. “We have already seen the green taxonomy create a much more commoditised market,” says Bond.

Taking these steps will ensure the market continues to grow and that impact bonds will help fund projects that benefit those in society who need it most. This is what will enable investors to make a real social impact.

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