The launch of a social bond fund by NN Investment Partners (NN IP) reflects a shift among investors towards social impact. NN expects total social bond issuance of €250 billion in 2022, which may appear optimistic based on wider market . Social bonds offer investors alignment with ten of the UN SDG goals, but care must be taken to avoid social washing claims.
Social bond volumes abating
In its Sustainable Finance Quarterly July 2022, Moody’s reported that global social bond issuance of $82 billion through the first half of the year was 45% lower than the first half of 2021. The ratings giant said it expects volumes to remain muted in the second half. This would place NN IP’s expectations of a year-on-year rise in social bond issuance of 30% in jeopardy.
Moody’s cites headwinds from fixed income markets in turmoil and a concentration of issuance (55%) from agencies as justification for its forecast. It may also be worth considering rumours from the European Commission that work on its social taxonomy, which was intended to provide a framework and metrics for social investment (similar to that of its Green Taxonomy) is going to be delayed due to challenges around inflation and the energy crisis. Another challenge has been the identification of metrics that reflect impact.
Roel van Broekhuizen, Portfolio Manager Green, Social and Impact Bonds, NN Investment Partners, said: “Only bonds that finance projects aligned with the Social Bond Principles will be selected, but we look beyond the standard labelling. All investments will be subject to a detailed issuer-level ESG screening and a rigorous social bond assessment which covers the use of proceeds, project evaluation, management of proceeds, and the reporting of the estimated social impact.”
Increasing investor interest in social impacts
Social bonds remain a viable means of raising money for projects with positive social outcomes, such as improving health or providing affordable housing. Europe had the largest volume of issuance regionally, accounting for nearly half the volume for the first half. NN IP has a positive outlook for growth opportunities in the sector, which currently has a capitalization exceeding €400 billion.
The popularity of social goals reflects investor desire to align financial objectives with sustainability goals such as the UN Sustainable Development Goals (SDGs). Investing in social bonds achieves a positive contribution to ten of the SDGs focused on addressing the world’s most pressing social goals like reducing poverty, hunger, and gender inequality, and boosting high-quality education and work.
NN IP’s fund may provide access to social impact investing to a class of investors that do not buy debt issuances directly from governments and government-related agencies. Social bonds have been a fast growing sustainable investment segment, alongside green bonds which have a longer track record as an asset class.
Social washing adds to rainbow of potential fraud
The misstatement of funds or false claims by entities raising capital via social bond issuance, termed social washing, adds to the litany of colourful phrases used to describe misleading or false sustainability claims. Products that are often affected by social washing include fashion, food, consumer electronics, personal care, and cosmetics, and most often involve false claims regarding labour protection laws.
NN IP plans to leverage its experience in the green bond market to effectively screen issuers, covering use of proceeds, project evaluation, and the reporting of the estimated social impact by actively engaging with issuers on a continuous basis.