Why ‘true’ social bonds are in short supply

There’s a dearth of true ‘social bonds’ in the market, but the reward for issuers can be great, explains Pendal ESG credit analyst MURRAY ACKMAN

• Pendal believes social bonds should serve the underprivileged
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• Find out about Pendal Sustainable Australian Fixed Interest fund

MOST social bond investors have the same aim: to make money while making a positive difference in society.

An example is the federal government’s National Housing Finance and Investment Corporation, which last year issued almost $200 million in social bonds, making returns for investors while providing cheap funding for social and affordable homes.

But not all social bonds are equal when it comes to use of proceeds, cautions Murray Ackman, a credit ESG analyst with Pendal’s income and fixed interest team.

“At the heart of social bond issuance is what the proceeds are is used for,” says Ackman.

“At Pendal, we want the proceeds to benefit the under-served. In the social bond market, that isn’t always the case.”

Not all social bonds are equal

The term ‘social bond’ has different meanings to different investors.

Social bonds are defined by The International Capital Market Association as use of proceeds bonds that raise funds for new and existing projects that address or mitigate a specific social issue or seek to achieve positive social outcomes.

But Pendal takes a more refined view, focusing on bonds that benefit the underprivileged.

“It means that we run into the risk of the proceeds of social bonds not being allocated as we’d want,” says Ackman.

“An issuer might promoted a ‘social bond’ — but it may not meet our criteria of helping the underserved in society.”

“For example, we’ve seen so-called ‘social bonds’ where proceeds have gone towards anyone impacted by Covid. That’s everyone.”

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“In the Netherlands, around 70 per cent of the population is eligible for some kind of social housing.

“So, the Dutch Housing Authority can do a ‘social bond’ — but that’s not going to fit our criteria.

“Our view is clear. A social bond should be an instrument to serve the underprivileged in society.”

‘True’ social bonds in demand

Availability of ‘true’ social bonds is contricted in a market where demand already outstrips supply.

Ackman believes issuers could do more to expand the market.

“Managers are looking for social bonds, not just because they want to bring social change, but also because there is so much demand for them, they will perform well in the secondary market,” Ackman says.

Social bond issuance is an area where supra nationals, such as the World Bank, play a large role, and semi-governments (typically state governments) can play a bigger role.

“If state governments are issuing social bonds, they need to target the underserved. Proceeds used to upgrade schools might not fit the definition, because that is just what state government do.

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“What’s more interesting is if the proceeds are used to provide more accessible schooling for the disabled, or new schools are built in regional and remote communities,” Ackman says.

Imapact of social bonds can be hard to track

There is also a challenge in reporting because established benchmarks might not be available.

“With green bonds you can report emissions avoided, or renewables generated, but in social bonds it can be much more bespoke. That’s fine for our purposes, though. We want to invest in projects that make meaningful change and a positive social contribution to society.”

Given the challenges in the market, and high demand, Ackman says issuers need to become more creative in how they bundle together bonds.

“We’d love to see a big bank that lends to ‘for-purpose’ organisations — those driven by a social mission, rather than profit — to pull a whole bunch of loans together and issue a social bond.

“That would benefit from a big bank credit rating, make it safer to invest in, and have a great social purpose attached. It’s happening in green bonds, and it would be good to see it in social bonds.”

“There are a lot of challenges that come with social bonds, but the demand is there.

“It is up to the issuers to meet that demand.”