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Social Bonds

7 min read 10 Oct 22

The following article contains the views and opinions of the Long-Term Investment Strategy team within the Treasury and Investment Office (T&IO). They are subject to change without notice and should not be taken as a recommendation, advice or forecast.

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Social Bonds

The explosion of ESG investing over recent years has tended to focus on environmental and governance issues with perhaps less focus being paid to social factors. This is increasingly being addressed with both companies and governments issuing social bonds. Here at T&IO we are increasing our exposure to this growing area of the market and have recently allocated part of the risk budget for our Planet range of funds to the Columbia Threadneedle Social Bond Fund. This allocation helps to diversify our sustainable bond exposure as well as enabling us to increase fixed income exposure to the UK market in line with our strategic asset allocation. 

What is a social bond?

Social bonds are a relatively new sector within fixed income. To help develop the market the International Capital Markets Association (ICMA) have published a set of voluntary guidelines, which set out best practice for organisations issuing social bonds. The principles include an overall definition of the sector as outlined below.

A social bond, like any other bond, is simply a loan. However, for a social bond the proceeds from the loan are used to finance a positive social outcome. These outcomes might be providing basic infrastructure, for example clean drinking water; providing essential services such as healthcare and education. Other uses for the proceeds could be to provide affordable housing to communities or to deliver food security – ensuring communities have access to nutritious food and reducing waste. The proceeds might also be used to finance programmes that enable socioeconomic advancement and empowerment. 

The population groups to which these projects are targeted are not pre-defined, but will typically include those living below the poverty line, marginalised groups, those living with a disability, the unemployed, minority groups, as well as vulnerable or displaced persons.

Sometimes bonds are issued that might also have an environmental objective alongside the social use for the proceeds. For example, a company might issue a bond to finance the development of renewable energy for a particular marginalised community. In such circumstances these bonds are termed sustainable bonds. It is from this pool of social and sustainable bonds that the Columbia Threadneedle Social Bond Fund will invest. 

Examples of social bonds

The first social bond issuer was Spain’s state owned bank the Instituto de Credito. It issued a 3 year bond in 2015, which aimed to provide credit facilities to SMEs within economically underperforming regions of Spain. In 2018, Danone became the first company to issue a social bond within the ICMA Social Bond Principles. Among the projects financed by Danone’s 7-year bond was Research and Innovation for advanced medical nutrition, which aims to produce specialised nutrition products for paediatric and adult care. 

In response to the Covid-19 pandemic there was an increase in social bond issuance. One such bond was issued by the African Development Bank. This 3-year US$3bn bond (the largest social bond at the time) was oversubscribed when issued at the height of the pandemic in March 2020. The proceeds from the bond are being used to alleviate the impact of pandemic on the livelihoods in Africa and on Africa’s economies. So-called Covid bonds were not just a feature of the developing world though. In 2020 the European Investment Bank also issued a Covid bond to help support the development of vaccines to combat the virus.

As the social bond market has developed so too have the types of issuers. The universe now includes many corporate alongside government and quasi government issuers. One more recent corporate example is NatWest Bank. In November 2019 NatWest became the first UK institution to issue a social bond under the principles laid out by the ICMA. The proceeds from the 5-year €750m bond are used by NatWest to refinance loans to UK based small and Medium sized enterprises in some of the most deprived areas of the country. 

Investing in Columbia Threadneedle

Columbia Threadneedle have been at the forefront of developing the social bond market. They have worked closely with governments and institutions such as NatWest to help grow this area of the market. Their social bond fund leverages on this expertise and uses the potential of the sterling bond market to help deliver both financial returns and positive social outcomes to the UK.

Despite the growth of the social bond investment universe, it remains a small component of the relatively small UK credit market. The Columbia Threadneedle Social Bond Fund therefore invests in both dedicated social and sustainable bonds as well as issuance from the broader sterling bond market. The objective of both allocations is to achieve a social and financial return.

To ensure consistency with the fund’s social objectives, the investment universe is screened into categories of bonds that have a higher potential for delivering social outcomes (housing and property, health and social care, education, learning and skills, employment and training, community services, financial inclusion, transport and communications infrastructure and utilities and the environment). Additional screens are applied to some of these categories. For example, in the financial inclusion category screens are applied to ensure that only those companies that higher social potential are included in the investment universe.

By Investing into the Columbia Threadneedle Social Bond Fund, PruFund Planet is able access this growing area of the ESG market, and to help bring about positive social change.

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