Have any new sectors or regions emerged in recent months or years?

Zarzycki: ‘We are seeing particularly strong growth in the field of blended finance. Good examples include the so-called Orange Bonds and the series of Women’s Livelihood Bonds. These instruments make it possible to channel capital into regions where investment is traditionally more difficult, whilst at the same time making a specific contribution to economic opportunities for women. Globally, women still receive only a very small proportion of the available funding. The economic potential of improved access to capital is therefore enormous.’

Bruning: ‘When it comes to social bonds, we must be wary of having too many different labels, frameworks and classifications. The more fragmentation there is, the harder it becomes to channel capital efficiently towards social and green projects.’

Byatt: ‘Thematic bonds are on the rise. For example, we are seeing bonds specifically focused on healthcare, gender equality or affordable housing. These instruments are valuable to investors because they define much more clearly which projects are being financed. This makes impact analysis simpler than with broad social bonds that combine diverse categories.’

Bos: ‘In recent years, we have seen increasingly specific forms of “use of proceeds” bonds. These are bonds where the proceeds are earmarked in advance for specific projects or expenditure. We recently saw an interesting example of a bond focused on the consequences of glacier melt. The proceeds are used to help communities adapt to the effects of climate change.

What developments are you seeing in the field of impact measurement and reporting?

Bos: ‘The situation has certainly improved in recent years. At the same time, the underlying methodologies still vary widely. As a result, consolidating impact data within a social bond fund remains a major challenge. I also believe that reporting KPIs alone is not enough. Quantitative data tells only part of the story. Case studies can help to better understand social outcomes in practice. I see engagement as one of the most powerful elements of the ‘use of proceeds’ model.’

Zarzycki: ‘It is no longer solely about green impact, but also about questions regarding the benefit to the community and issues such as: which communities benefit from this, what health benefits arise, and what broader societal impacts are achieved? We expect this form of reporting to become even more important in the future.
 

When it comes to social bonds, we must be careful not to have too many different labels, frameworks and classifications.

 
Byatt: ‘We are very positive about the emergence of social co-benefits within green bonds. We use case studies to give clients a real insight into what their investment has made possible.’

Bruning: ‘If we place too much emphasis on increasingly extensive quantitative reporting, we run the risk of overestimating the impact or creating unnecessary complexity. We must avoid raising the bar for issuing social bonds ever higher. After all, additional reporting requirements entail costs and administrative burdens. Although AI may be able to alleviate some of these burdens in the future, it remains important to maintain a good balance between information needs and practicality.’

What obstacles do investors face when considering allocating a specific portion of their portfolio to social bonds? And how can these obstacles be overcome?

Byatt: ‘The market for social bonds is still relatively concentrated. Governments, supranational institutions and development banks dominate the issuance volume. The number of corporate issuances therefore remains limited. This is logical, as many social projects align more closely with public policy objectives than with the core activities of companies. This can be resolved by approaching social bonds from a broader perspective, looking at social outcomes across all designated labelled bonds and possibly even at the ‘general corporate purpose’ of highly socially oriented entities, such as charitable organisations.’

Bos: ‘The debate surrounding green and social bonds often centres on a few basis points’ difference in yield compared with traditional bonds. That discussion may be given too much attention, as the potential difference is currently very limited and often barely measurable. As far as we are concerned, the far more important question is what the inclusion of green or social bonds means for the portfolio as a whole. Does it alter the risk diversification? Which issuers are you adding? How does that affect the overall portfolio structure? Moreover, we sometimes see that issuers who previously issued only conventional bonds are assessed differently by the market following their first green or social issue. That effect can extend across their entire yield curve. Such broader market effects are likely more important than the question of whether a limited ‘greenium’ is present on a specific bond.’

Veldmeijer: ‘I think a greenium mainly arises when there is scarcity. We saw that with the first generation of green bonds. At that time, supply was limited and demand was high. This led to a temporary price differential. As the market grew and more issues became available, that effect largely disappeared.

How do social bonds find a place in the portfolio? And what, if anything, might be holding investors back from investing in them?

Bos: ‘The key question is not whether you invest in social bonds as a standalone asset class, but what the impact is on your overall portfolio. When you look at the global bond market, exposure is often concentrated among a limited number of large issuers. By adding impact bonds, that concentration can shift. For example – depending on the overall portfolio – you may reduce the weighting of dominant issuers and create the potential for greater diversification within the portfolio.’

Bruning: ‘Due to the limited diversification within the social bond universe, I expect allocations to social bonds to always be smaller than those to green bonds. In my view, it would not be prudent to replace a large portion of a fixed-income portfolio exclusively with social bonds.
 

The far more important question is what the addition of green and social bonds means for the portfolio as a whole.

 
Zarzycki: ‘Including both green and social bonds creates greater flexibility and better diversification within the portfolio. If you focus exclusively on a single theme, there is a risk of over-concentration. By taking a broader view, you can manage the portfolio in a more traditional fixed-income manner, whilst at the same time pursuing positive environmental and social outcomes.’

Byatt: ‘Our clients are indeed increasingly seeking an integrated approach to social and environmental issues. The reason for this is simple: social and environmental problems are not separate from one another. Within our funds, every bond must first meet all the exclusion criteria. We then carry out an in-depth analysis of the positive social outcomes. In doing so, we look at themes such as affordable housing, healthcare, education, employment and resilient essential services that contribute to a sustainable society.’

Investing in private markets is becoming increasingly popular, particularly when positioned as impact investing. Does this trend come at the expense of social bond funds and social mandates, or do the two actually reinforce one another?

Bruning: ‘We are indeed seeing growing interest in private credit and private equity within impact investing. However, we do not perceive this as a shift away from labelled bonds. Both approaches are complementary. The type of investor may also play a role. Smaller or less experienced institutional investors are often more attracted to the market for labelled bonds because of its accessibility and transparency. More experienced investors are more frequently active in private markets. On balance, we do not see a substitution effect between the two segments.’

Veldmeijer: ‘Both markets can co-exist perfectly well. If you define impact very strictly and place great emphasis on additionality, then the private market may seem attractive. There, it is often easier to demonstrate a direct contribution to a project or enterprise. However, if you apply a broader definition of impact, social bonds can be just as suitable an instrument.

Zarzycki: ‘What is unique to the fixed-income market is the role of governments. Through government bonds, municipal bonds and issues by multilateral development banks, investors can contribute directly to social objectives on a large scale. That is precisely why public markets remain a powerful instrument for social impact.’

Bos: ‘I agree that both markets can go hand in hand. Our experience is that when investors choose to dedicate part of their portfolio to impact investing, they usually do so across multiple asset classes. Labelled bonds are often a logical first step, as virtually every institutional investor already has a substantial allocation to liquid bonds. In addition, we see, for example, that pension funds invest in private impact funds, whilst using social or green bonds as part of their liquidity management. This precisely demonstrates how both approaches can complement each other.

Have you noticed that clients wishing to invest in social bonds are becoming increasingly well-informed and have more explicit views on impact?

Byatt: ‘Over the past few years, clients have developed a much more positive view of impact investing. Discussions have become more substantive, and investors are asking increasingly targeted questions about the actual social outcomes of their investments.’