'Social bonds' are surging as conscious investing turns mainstream

Key Points
  • According to S&P Global Ratings, social bond issuance has quadrupled so far this year as conscious investors combine purpose with profit. 
  • Social bonds are already being used to address rising inequalities created by the coronavirus pandemic. 
  • Morgan Stanley says $32 billion dollars of social and sustainability bonds were issued in April 2020 alone. 

In this article

Trevor Williams

New research shows the issuance of social bonds has reached record levels and more than quadrupled so far this year, as conscious investors combine profit and purpose to address rising inequalities created by the coronavirus.

According to S&P Global Ratings, "Recent growth in social bond issuance indicates that the COVID-19 pandemic has not turned issuers' or investors' attention away from sustainable finance — rather, interest seems to be growing."

Social bonds are a form of debt that allow investors to help raise funds for projects with positive social outcomes that in some cases, provide an investment return. They include projects on improving food security and access to education, as well as health care and financing.

With unemployment spiking around the world, rising fatality rates and strained health-care systems, S&P expects social bonds to emerge as the fastest-growing segment of the sustainable debt market in 2020, even as credit conditions weaken.

It stands in sharp contrast to the rest of the global fixed income market, where issuance volumes are expected to decline 9% this year, according to S&P.

"Undoubtedly, much of this rapid growth can be attributed to the effect of the COVID-19 pandemic, which has accelerated issuance of social bonds to finance both public and private responses and create positive social outcomes, especially for target populations," the firm said.

Whoever cares wins?

While social bonds only make a small part of the multi-billion dollar global sustainable debt market, their popularity is surging in the midst of the pandemic.

Morgan Stanley says $32 billion dollars of social and sustainability bonds were issued in April 2020 alone. It marked the first month in which social and sustainability bond issuance surpassed green bonds, which saw a total of $257 billion in issuance last year. 

A record $400 billion in sustainable debt was issued in 2019. The Climate Bonds Initiative (CBI) said social bonds made up approximately $20 billion of that, or around 5%. 

Source: Climate Bonds Initiative, S&P Global Ratings

Major initiatives already underway

This year, countries such as Ecuador and Guatemala issued sovereign social bonds aimed at financing COVID-19 response efforts. In Guatemala, the proceeds are being used to finance health infrastructure improvements and initiatives in food security, support for businesses and professionals, and preventative health and medical practices, S&P said.

The African Development Bank also launched a $3 billion "Fight COVID-19" social bond, becoming the world's largest dollar-denominated social bond transaction to date. 

In June, the U.S.-based Ford Foundation announced it will issue US$1 billion of social bonds, making it the first nonprofit foundation to offer a labeled social bond in the U.S. corporate bond market.

"As the crisis unfolds, we believe a number of supranational, government agency, and corporate COVID-related issuances will likely follow," S&P added.

Source: Environmental Finance, S&P Global Ratings 

S&P said measuring the impact and return of a social bond investment remains challenging, given the limited transparency and standardized reporting within the emerging sector. 

"This challenge is compounded by the fact that benefits are often more qualitative than quantitative," said Lori Shapiro, one of the primary credit analysts at S&P.

"Improved transparency and reporting practices will ultimately help reduce some of the social bond risks, including social-washing, and solidify investors' confidence in the asset class as it grows, ultimately propelling further issuance."