Blog post: The issue of no issues - The case for social bonds

This blog post is written by Moa Duvhammer, Analyst, Sustainable Bonds at Danske Bank.

Social bonds could be part of the solution to global challenges such as rising inequality, hunger and access to health services. So how come the market isn’t picking up speed?

Last week, I had the pleasure of discussing the role of institutional investors and issuers in the nascent social bond market at a seminar chaired by Ulrika Hasselgren, Global Head of Sustainability & Impact Investment at Danske Bank.

The background to the event was that four years have passed since the adoption of the 2030 Agenda and the global sustainable development goals (SDGs) and the first progress report was published in July. There has been significant progress in many of the areas, including extreme poverty, immunizations and access to electricity. Still, for some of the areas, progress has been slow or even reversed and need attention if the goals are to be achieved by 2030. These include increasing inequality among and within countries, a global rise in hunger, and half of the world’s population not having access to essential health services.

Social bonds as a driver for sustainable development

Social bonds could very well be part of the solution. Similar to green bonds, social bonds are a financial instrument that enables companies, municipalities, agencies and banks to channel capital into projects that create positive social value for one or more target populations.

But while the green bond market is booming, social bond issuance is not yet gaining real momentum. Even less so in Sweden, which is at the forefront of green bond issuance globally while not a single social bond have been issued from a Swedish issuer. This is despite growing social concerns such as rising income inequality, demographic changes, urbanization, vulnerable areas, longer life expectancy and many newly-arrived migrants of school age, which put pressure on welfare services like schools, elderly care, and housing. Another challenge is the increasing cost of illness, including costs for healthcare and lost productivity.

Local governments will not be able to fund these challenges alone, but if they can be translated into investment opportunities, they could form a good basis for social bond financing.

3 challenges that stall growth in social bonds

While action plans to tackle climate change are developing, parallel actions to manage the increasing social risks have not materialised at the same pace – despite being a potential hurdle for progressing on the climate goals.

Where green bonds account for about 87% of the global market for sustainable bonds (including green bonds, social bonds and sustainability bonds), social bonds only represent 5%, and with little diversity in issuer types, which are dominated by Supranational/Government Agencies and Financial issuers in opposition to only a few Corporate issuers.

Based on the discussions at our event, three major challenges can be highlighted for the social bond market:

1)The difficulty of finding scale and actual assets and investments to finance with social bonds.

2)The complexity and lack of standardisation in how to report on impact, incl. a very limited focus from public bodies and regulators compared to green bonds.

3)Hesitancy from investors on whether social projects can generate the target returns needed.

For Sweden specifically, the lack of supply of social housing is also posing a challenge, as this has been the basis of sustainable financing in other European countries.  

Investor interest is slowly picking up

Luckily, there is a positive outlook for the social bond market. Another conclusion from the day is that social bonds finally seem to get the attention needed, with a range of local governments and real estate companies looking into projects targeting improved inclusion and affordable housing in the more vulnerable areas in Sweden. In addition, the majority of institutional investors claim they are actively seeking the opportunity to invest in social bonds – offering an opportunity for issuers to increase their investor base. Finally, financial institutions can support the market by financing small and medium Enterprises in these areas, contributing to employment generation, which in turn can be financed by social bonds and further boost the market.

Thanks to all that participated in the seminar, and to Dr. Sophie Nachemson-Ekwall, Stockholm School of Economics, and Peter Lööw, Head of Responsible Investment at Alecta for your speeches and important insights.

Want to get in touch?