On Social Bonds
In the African Economic Outlook 2021, the African Development Bank writes that the pandemic has caused the continent’s first recession in half a century. In response to the crisis, the Bank has found an innovative solution to alleviate its effects: Social Bonds.
What are Social Bonds?
Bonds come in different sizes and colors, such as Government, Corporate, and Green Bonds. Simply put, a bond is a loan made by an investor to a borrower. In the case of the $3 billion Social Bond launched by the African Development Bank (The largest U.S. dollar-denominated Social Bond ever), it will pay an interest rate of 0.75%.
In contrast to a Green Bond, where proceeds are applied towards environmental and climate causes, the proceeds of Social Bonds are directed towards social purposes and outcomes.
The International Capital Market Association has published guidelines for issuing Social Bonds. These are known as the ‘Social Bond Principles.’ ICMA suggests the following project categories:
Affordable basic infrastructure
Access to essential services
Affordable housing
Employment generation
Food security and sustainable food systems
Socioeconomic advancement and empowerment
The Influence of Bonds
Like Green Bonds, Social Bonds show investors that money is committed to a specific purpose. Issuers can present it as a separate, non-interchangeable item on their balance sheet or budget. In addition, they explain to the general public why they consider a particular social problem to be a priority.
Two examples: The first formal Social Bond offering was delivered by the Spanish Instituto de Credito (ICO). It was a €1bn bond, with a three-year term. Credit Agricole, Goldman Sachs, HSBC, and Santander were the banks leading the operation. Proceeds were used to finance SMEs in economically depressed regions of Spain. In the same year, Kutxabank issued a social bond (size: €1bn, 10 years maturity). The proceeds were used to finance and subsidize social housing projects in the Basque region.
A Future for Social Bonds
Certainly, the social bond era has been accelerated by the pandemic. It’s just a matter of time until more institutions and corporations issue them. Of course, much like Greenwashing - which conveys a false impression of the environmental credentials of a project or a company - Socialwashing can occur, too. This is why mindful concepts and reliable auditors are needed, in order to assure that the impacts of social investments are not falsely overstated.
Nonetheless, the potential of Social Bonds is huge. For the first time, banks and corporations are putting social problems on their balance sheets. The African Development Bank has told investors that helping people in need can be profitable. I think this is positively shocking.
Further Reading:
The law firm Cleary Gottlieb explains Social Bonds to Issuers
African Development Bank launches record breaking $3 billion “Fight COVID-19” Social Bond