Social Bonds

Sustainable finance has gained momentum in recent years due to an increasing appetite among investors for responsible investment options that appropriately consider environmental, social and governance (ESG) criteria in their valuation processes. The term “sustainable finance” includes green bonds (for projects that positively impact the environment), social bonds (for projects that contribute to positive social outcomes) and sustainability bonds (for projects that have positive effects, both environmentally and socially). 

Social Bonds are use of proceeds bonds that raise funds for new and existing projects with positive social outcomes. 

Social Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or refinance in part or in full new and/or existing eligible Social Projects.

A host of social issues have arisen as a result of COVID-19. In addition to the strain on the global healthcare industry, individuals and businesses across all industries will undoubtedly feel the financial effects of preventative measures, including the temporary closure of non-essential businesses, social distancing and other physical distancing strategies. Social bonds have the potential to finance projects that address or mitigate these specific social issues.

The purpose of social bonds goes beyond its financial component. The securities are intended to help align the interests of different entities – including governments, investors, social enterprises, and the general public – to develop effective solutions for public-sector problems.

Although the security is called a bond, they lack most of the features of conventional bonds. They feature a fixed term, but they do not offer a fixed rate of return to investors. Instead, the repayment of the bonds primarily depends on the success of the project that has been subsidized using the bonds.

If a project is successful, the investors are repaid by the government using the savings that have been created by the project. However, if the project fails, the investors do not receive anything. Therefore, social bonds come with high risks for investors.

Social bonds provide benefits similar to green bonds for both issuers and investors.

On one hand, for issuers, social bonds are a good opportunity to diversify their investor base by including buy-and-hold investors. Moreover, issuing a social bond could also help in enhancing the company’s reputation and attractiveness towards its stakeholders and thus, eventually, in obtaining lower long-term financing costs and positive repercussions on the share prices. However, evidences are scarce and differ case-by-case.

On the other hand, investors are able to ring-fence their financing to corporates with clear social objectives. More, the social impact is free: as with green bonds, the risk-return profile of a social bond is the same as that of a vanilla bond from the same issuer. Lastly, the required reporting increases the transparency of the use of proceeds and reduces the likelihood of “impact washing”.

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