Social bonds are exploding: this segment has tripled in one year, recording the strongest growth in the sustainable bond universe in 2020. The poor cousins of environmental, social and governance (ESG) investments, they now represent more than a third of the ESG bond universe, compared with 6% to 8% between 2017 and 2019. That dynamic has continued in 2021: at the end of June, €166bn had been issued on a market that currently has about €280bn globally. The trend has been linked to the pandemic and to the activity of national and supranational sovereign or quasi-sovereign issuers. The European Union is in the lead, having issued €17bn in social bonds under the SURE programme to help member states finance employment support programmes in the context of the pandemic, which can be seen as the turning point in the market. To date, €75bn in bonds have been sold by Brussels to finance this programme.
A market still dominated by sovereign issuers
"Sovereign or quasi-sovereign issuers dominate the market, which is easily explained by the nature of the projects financed, most often in the fields of health, employment or the fight against poverty. Whatever their size--from the European Union to a municipality--they are the ones whose mandates include the financing of a large number of social projects relating to the climate, education, inclusion and urban policy. These are all elements that fall within the categories supported by the Social Bond Principles as laid down by the International Capital Markets Association and which serve as guidelines for the selection of issues by the fund," explains Isabelle Vic-Philippe of the investment management outfit Amundi.
But other players are also active. Banks and, to a lesser degree, insurance companies, for example, find it an "easy" way to refinance portfolios of loans for social housing.
Social bonds, on the other hand, are still finding it difficult to make inroads among non-financial companies. There are several reasons for this. Firstly, because it is more difficult for a company to define quantifiable social objectives outside the area of diversity. "It is more specific and a bit complicated for them insofar as, as a general rule, there must be a link with their activity and internally there is often reluctance to do business projects aimed at disadvantaged populations. Either because of the fear of cannibalising the business model, or because the subject is likened to charity", says Vic-Philippe. She points to the example of a leasing company in Great Britain that has developed an offer for disabled people and provides a vehicle and a service adapted to each person at a price in line with the disability allowance that the person receives.
Towards a development similar to that of green bonds
It is in this context that Amundi has launched its Amundi Social Bonds fund. The fund manager intends to position itself on a market that it wishes to support and which it believes "will follow a similar development to that of green bonds".
The investment policy is transparent: "the fund invests a majority--at least 75%--in social bonds that comply with the SBP principles and whose funds are allocated to projects that are themselves eligible within the framework of these SBPs.” It is understood that, in addition to the "classic" credit risk, the overall ESG practices of issuers will be scrutinised and may, if necessary, become an exclusion criteria. "We are very attentive to the credibility of the issuer, to the quality of the projects financed, and we require real transparency on the use of the funds from the moment they are raised to the moment they are spent, as well as detailed reporting after the fact.” Innovative instruments such as sustainability-linked bonds with a social purpose may also be held in the portfolio.
In Amundi Social Bonds, there are no predefined social themes. The idea is really to focus on SBPs and to have a broad and inclusive vision of the whole issue.
An "innovative" strategy, reckons Vic-Philippe, "which makes it possible to combine social and financial performance by investing in a classic bond product. As a general rule, most funds focus on the social dimension of the companies in which they invest. These are mainly equity funds that use internal ESG indices or ratings. An approach followed by the only fund that, to my knowledge, has this social dimension in fixed income and which focuses on social issues to which it is sensitive. In Amundi Social Bonds, there are no predefined social themes. The idea is really to focus the approach on SBPs and to have a really broad and inclusive vision of all these social issues that can exist both in terms of project categories, in terms of target population and in terms of geography."
The manager also sees innovation in the expansion of the field of possibilities. "The investor concerned about their social impact is confined to local equity funds focused on small companies and ultimately is quite close to private equity. A universe that is ultimately quite limited. I have access to the global bond universe. In terms of geography, even if Europe dominates in terms of the number of issuers, the market will inevitably develop.”
For investors and managers, social bonds are a good way to add to and diversify their ESG portfolios, says the fund manager, who sees demand from retail investors for innovative solutions that have a positive impact on society as a whole. "The idea is that anyone can invest in social projects without having to take equity risk or sacrifice returns.” A secure return as supranational issuers dominate the market. "For the moment, we are at around 0.20%.” The risk is attached to the issuer. "It's a classic risk.”
Originally published in French by and translated for Delano