Definition and Overview

The Social Bond Principles (SBP) are voluntary guidelines aimed at promoting the role of global debt capital markets in financing projects that contribute to social sustainability. Together with other principles like the Green Bond Principles, Sustainability Bond Guidelines, and Sustainability-Linked Bond Principles, the SBP focus on best practices for issuing bonds that serve social and environmental purposes. Developed by the International Capital Market Association (ICMA), these principles emphasize transparency, disclosure, and the importance of environmental and social impact in attracting capital for sustainable development.

Goals and Objectives

The main goal of the SBP is to support issuers in financing socially beneficial and sustainable projects that deliver positive social outcomes. Issuers are encouraged to provide transparent information about the social credentials of their projects and investment opportunities. Transparency is key in communicating the expected and achieved impact of projects, with recommendations for using qualitative and quantitative performance indicators. The SBP also outline core components and key recommendations for issuing Social Bonds, including the use of proceeds, project evaluation and selection process, management of proceeds, and reporting.

History

Evolution of Social Bonds

Social bonds are a relatively recent innovation in the financial markets, designed to address social issues directly through capital funding. The concept of social bonds emerged from a growing recognition of the role that finance plays in achieving social objectives alongside economic returns. Initially, the focus in sustainable finance was more on environmental issues, leading to the development of green bonds. However, as investors and issuers became more socially conscious, there was a natural progression towards financing projects with explicit social benefits. This shift marked the beginning of social bonds, which specifically aim to finance projects like affordable housing, education, healthcare, and employment initiatives, particularly in disadvantaged communities.

The Development of SBP by ICMA

The International Capital Market Association (ICMA) played a pivotal role in formalizing the framework for social bonds with the introduction of the Social Bond Principles (SBP) in June 2017. These principles were developed with the objective of providing a high-level framework that enhances transparency and disclosure in the social bond market, ensuring that funds raised are used to achieve positive social outcomes. The SBP were built on the foundation of the Green Bond Principles, extending the focus to social projects. They outline four core components:

  1. Use of Proceeds

    Definition: This principle clarifies the specific social issues or projects the raised funds will be directed towards.

    Key Requirements: Issuers must specify eligible social categories aligned with the ICMA’s Social Bond Categories (e.g., affordable housing, education, healthcare). Clearly define the intended use of proceeds for each category, providing quantifiable targets and expected impact. Exclude proceeds used for refinancing existing projects unless they demonstrably contribute to positive social outcomes.

    Investor Benefit: Transparency regarding intended use fosters trust and facilitates impact investing decisions.

  2. Project Evaluation and Selection Process

    Definition: This principle outlines the process for selecting projects that deliver the intended social impact.

    Key Requirements: Establish a process for project evaluation and selection considering social impact alongside financial viability. Consider relevant environmental and governance factors when evaluating projects. Employ qualified professionals with expertise in the targeted social categories for project assessment.

    Investor Benefit: Rigorous project selection enhances confidence in the bond’s potential for positive social impact.

  3. Management of Proceeds

    Definition: This principle guides the tracking and allocation of funds to ensure they are used exclusively for the designated social projects.

    Key Requirements: Implement internal controls and safeguards to track and manage proceeds effectively. Allocate funds solely to pre-defined eligible projects, preventing their diversion for other purposes. Regularly monitor projects and report on the use of proceeds against the initial plan.

    Investor Benefit: Robust management practices instill confidence in the responsible use of invested funds.

  4. Reporting

    Definition: This principle mandates transparent communication about the social impact achieved through the use of proceeds.

    Key Requirements: Prepare annual reports following the ICMA’s Social Bond Impact Report template. Quantify the achieved social impact using relevant metrics aligned with the selected social categories. Discuss any challenges encountered and measures taken to address them. Consider external verification by independent third-party experts to enhance credibility.

    Investor Benefit: Regular and comprehensive reporting promotes accountability and allows investors to track the social return on their investment.

Comparison with Green Bonds and Sustainability Bonds

Types of Social Bonds

There are currently four types of Social Bonds:

  1. Standard Social Use of Proceeds Bond Purpose: This type of bond is the most common form of social bond. It follows a use-of-proceeds structure where the funds raised are earmarked for social projects. These projects typically aim to address or mitigate a specific social issue or achieve positive social outcomes.

    Features: The issuer commits to transparency and accountability by reporting on how the funds are used and the social impacts achieved. The projects funded can range across sectors such as healthcare, education, affordable housing, and employment.

    Investor Appeal: Attracts investors looking to contribute to tangible social impacts, with the assurance that their capital is directly funding projects with a positive social outcome.

  2. Social Revenue Bond Purpose: Social revenue bonds are issued by entities that finance social projects expected to generate revenue. These could be public or private initiatives, and the bond’s repayments are often made from the revenue generated by the project itself.

    Features: Typically used for projects that have a clear revenue stream, such as social housing developments that collect rent or social enterprises that sell goods or services. The bond’s attractiveness to investors depends on the project’s revenue-generating potential and its social impact.

    Investor Appeal: Suitable for investors who are interested in projects with a self-sustaining financial model, offering a balance between social impact and financial return.

  3. Social Project Bond Purpose: Social project bonds are specifically designed to finance individual social projects with defined outcomes. These bonds are project-based, meaning the funds raised are tied to the completion and success of a single project rather than a portfolio of projects.

    Features: The bond structure is closely tied to the project’s specifics, including its scope, timeline, and expected social outcomes. Investors are usually provided with detailed information about the project, including its objectives, implementation plan, and impact metrics.

    Investor Appeal: Attracts investors who are interested in funding specific social initiatives, where the impact is direct and measurable, and where they can clearly see the contribution of their investment to societal benefit.

  4. Secured Social Bond Purpose: Secured social bonds are backed by collateral, providing an additional layer of security for investors. The collateral could be in the form of assets, a guarantee from a third party, or another form of security interest that backs the bond issuance.

    Features: This structure reduces the risk for investors, as there is an underlying asset or guarantee that can be used to repay the bond if the issuing entity defaults. The proceeds are still used to finance social projects, but the added security makes these bonds more appealing to a wider range of investors.

    Investor Appeal: Particularly attractive to risk-averse investors who are interested in social impact investing but seek the additional assurance provided by collateral. This can also potentially lower the borrowing costs for issuers due to the reduced risk.

Applications and Benefits of Social Bonds

Examples of Funded Sectors

Social Bonds finance projects across diverse sectors driving positive social change:

  • Affordable Housing: Issuing Social Bonds can fund construction or renovation of affordable housing units, improving access to safe and secure living for low-income communities.

  • Education: Bonds can finance scholarships, school infrastructure development, or educational technology initiatives, enhancing access to quality education for underprivileged groups.

  • Healthcare: Funds can be directed towards building hospitals and clinics in underserved areas, improving access to essential healthcare services and medical equipment.

  • Financial Inclusion: Issuers can utilize Social Bonds to provide microloans to small businesses and individuals excluded from traditional finance, fostering economic empowerment.

  • Gender Equality: Projects financed through Social Bonds can address gender disparities in areas like education, healthcare, and economic opportunities.

  • Climate Resilience: Social Bonds can fund projects that build community resilience to climate change, such as sustainable water management or disaster preparedness initiatives.

Contribution to SDGs

Social Bonds directly contribute to achieving various Sustainable Development Goals (SDGs):

  • SDG 3 (Good Health and Well-being): Financing healthcare infrastructure and services.

  • SDG 4 (Quality Education): Funding scholarships, teacher training, and educational technology.

  • SDG 5 (Gender Equality): Supporting women’s entrepreneurship and access to finance.

  • SDG 8 (Decent Work and Economic Growth): Providing microloans and supporting small businesses.

  • SDG 10 (Reduced Inequalities): Promoting financial inclusion and addressing social disparities.

  • SDG 11 (Sustainable Cities and Communities): Funding affordable housing and climate-resilient infrastructure.

Benefits for Stakeholders

  • Issuers: Diversify funding sources and attract impact investors. Enhance brand reputation and social responsibility image. Gain access to potentially lower interest rates due to investor demand.

  • Investors: Generate financial returns alongside positive social impact. Align their investments with values and contribute to SDGs. Diversify portfolios and potentially mitigate risk through social impact focus.

  • Society: Address social challenges and improve lives in various sectors. Promote sustainable development and achieve SDGs. Create a more just and equitable society through innovative financing solutions.

Resources and Data Sources

Resources for Social Bond ICMA Social Bond Principles, Webinar on Social Bonds Market Trends, “Introduction to Social Bonds” eBook, Case Studies on Successful Social Bond Issuances

Data Sources for Social Bond Analysis ICMA Database, Bloomberg Terminal, Sustainable Bond Database (UNEP FI)