How has the social bonds market developed since its early years?

Letty Byatt: ‘The real breakthrough for social bonds came during the COVID-19 pandemic. In 2020 and 2021, a huge amount of emergency funding was raised for social purposes, particularly through the European SURE programme (Support to mitigate Unemployment Risks in an Emergency). At the time, this represented around 98 billion euros and accounted for more than 30 per cent of the total market for rated bonds. Following the pandemic, that emergency funding declined. Since then, we have seen a more stable and mature market emerge. Whereas social bonds were primarily used during the pandemic for employment programmes, income support, and assistance for small and medium-sized enterprises and the healthcare sector, they are now increasingly being deployed to tackle structural social inequalities.’

Jessica Zarzycki: ‘Affordable housing has remained one of the most dominant themes within the social bond market. This is not surprising, as affordable housing is relatively easy to measure compared with many other social outcomes. Moreover, there is broad support for this theme amongst governments, local authorities, businesses and financial institutions. With other social themes, such as vocational training, healthcare or access to essential services, it is often more difficult to measure impact.’

Bram Bos: ‘If you look at the issuance figures for the past ten years, it is clear that the COVID-19 period has given a massive boost to the social bond market. Around 2020, growth expectations for this market were high. On a positive note, the segment has developed well since then. However, there are also areas for concern. For example, we had expected far more issuances from industrial companies investing in better working conditions or social provisions within their supply chains.’

Quintin Veldmeijer: ‘Whilst the number of social bonds within the overall market for sustainable bonds has fallen slightly, we are simultaneously seeing strong growth in sustainability bonds, which combine social and green objectives. Although green projects still dominate this segment, the social component is on the rise.’

What are the key factors behind the emergence and growth of the social bond market?

Gwennaële Bruning: ‘As far as corporate issuances are concerned, it is not only banks that are active. Property companies are also playing an increasingly significant role. Although the number of corporate issuances has increased, this segment of the market may have grown more slowly than some market participants had anticipated. At the same time, it is not surprising that the market for social bonds is still dominated by government-affiliated institutions. After all, many social objectives – such as affordable housing, social services or inclusion programmes – align more closely with public rather than corporate objectives.’

Zarzycki: ‘In recent years, the broader sustainability market has focused heavily on climate change and the energy transition. As a result, social issues have sometimes taken a back seat. For many people, however, social challenges are more urgent than climate issues. When someone lacks affordable housing, struggles to put food on the table or has no access to healthcare, those problems naturally take priority. As more capital is channelled into tackling social problems, this ultimately creates a more solid foundation for addressing long-term challenges, such as climate change.’

Byatt: ‘We are also seeing the reverse trend: some green investments inherently have a strong social component. Climate adaptation bonds are a good example. These involve, for instance, increasing the resilience of utilities, roads and other critical infrastructure, so that people retain access to drinking water, healthcare, transport and communications during natural disasters.’

What developments have you observed in the use of social bonds?

Veldmeijer: ‘Compared with five years ago, financial inclusion has become much more sophisticated. Initially, the emphasis was mainly on microfinance, but the market has now become much more targeted. There is an increasing focus on specific target groups, such as disadvantaged communities, minorities and women. As a result, the market has shifted from broad microfinance programmes to much more specifically defined social objectives.’

Bos: ‘We are seeing interest from some investors in sustainable and social investments in emerging markets. We see this with green bonds from emerging markets, but I think the same applies to social bonds. Some investors are considering investing in emerging markets via social bonds. This is particularly true now that many investors want to maintain exposure to US dollars, whilst at the same time seeking to broaden their geographical diversification.

Bruning: ‘We’re actually seeing a different trend. Many clients are looking for impact that’s visible closer to home. As a result, the focus is shifting towards the Netherlands and Europe rather than distant markets.’

Veldmeijer: ‘From the perspective of social impact, one could argue that it is precisely in emerging markets where the greatest differences can be made. Impact is also possible in developed markets, but the potential social added value is often considerably greater in emerging economies.’

Byatt: ‘It is true that the disparities between rich and poor countries are vast and that emerging markets offer many opportunities for impact. At the same time, you can also achieve substantial social outcomes in developed economies by focusing on vulnerable or disadvantaged groups. As part of our global strategy, we are keen to invest in emerging markets, but within our European and UK funds, we specifically seek out bonds that are strongly focused on those regions, with particular attention to vulnerable communities.’

One of the categories within social bonds is job creation. But how do you determine when job creation actually serves a social purpose rather than simply an economic one?

Bos: ‘Every organisation has its own definition of what is social, sustainable or impactful. For example, we look specifically at financing for small and medium-sized enterprises in regions with above-average unemployment. At the same time, this illustrates precisely why social bonds are complex. What is socially relevant in one region may not be so elsewhere. Consequently, the analysis requires far more bespoke work than is the case with green projects. With a wind farm, it is relatively straightforward to determine the environmental impact, regardless of where it is located. With social housing or employment programmes, the situation is much more nuanced. That is why each party has ultimately developed its own assessment framework.’
 

For many people, social challenges are more urgent than climate issues.

 
Zarzycki: ‘I think new social issues are emerging around developments such as artificial intelligence and data centres. When we engage with major technology companies, we discuss not only their environmental impact, but also their relationship with local communities, investments in education and vocational training, and their broader social responsibility.’