Investing in social and sustainability bonds

In this module within our Sustainable Bonds series, we will cover social and sustainability bonds and how they can be used in a portfolio.

The need to transition to a sustainable economy from an environmental perspective is well publicized, however, the need to address the social dimension of this transition is just as crucial in achieving this goal. The dial is moving on this as strikes, regulation scrutiny and social media pressure have highlighted to companies and governments the material importance of addressing growing inequalities and supporting low to middle income communities. These social groups are also more likely to be adversely impacted by the increasing regularity and severity of natural disasters as well as the structural changes that imply a transitioning economy.

Social bonds are an investment tool designed to finance a range of projects related to employment generation, education or access to basic needs such as affordable housing, health care services.

Sustainability bonds combine both elements of green and social bonds by financing projects that combine both social and green elements. While for both asset classes, quasi-sovereigns make up the largest proportion of issuers, the number of issuers from other sectors is growing.

As the chart demonstrates, along with sovereigns, corporations such as industrials, financial and utilities are beginning to issue bonds for social and sustainability projects.

This is important because as more issuers enter the market, more options will be available for some of the key social themes such as education, housing, infrastructure and healthcare. A social bond, for example, might be one that is issued by a financial institution in order to support affordable housing or employment in low-income areas.  As more social and sustainability bonds are issued, the need to be careful in bond selection is as important as ever. That is why our sustainable bonds framework is essential for identifying only those issuances that meet our key criteria such as sustainability strategy, type of project and transparency.

Social and sustainability bonds are still burgeoning asset classes that need greater diversification, however these bonds, like green bonds, benefit from the high transparency they provide and outcome-based metrics that investors can monitor. These factors are likely to only improve with greater regulation, and the support of the International Capital Markets Association providing guidelines for sustainable bonds. 

The transition to a low carbon economy isn’t without its social issues It needs to be a Just Transition. This means it needs to be achieved in a fair way, leaving no one behind. Add to that the negative impact climate change is having on societies and, we believe, the demand for social and sustainability bonds will increase as companies, governments and investors appreciate the value of a long term sustainable economy.