Social Bonds Are All The Rage: How to Credibly Attain The Coveted Designation
Social bonds, which raise funds for new or existing projects seeking to address social issues, continue to soar in popularity among investors – but how is “social bond” designation achieved?
The primary criteria for social bond designation is established by the United Nations Sustainable Development Goals (UNSDG). The United Nations identifies 17 UNSDGs relating to poverty, health, education, inequality, climate change, environmental preservation, and other initiatives. The purpose for which social bonds are issued should align with one or more of these UNSDGs. The International Capital Market Association (ICMA) has created additional guidance for issuers of social bonds, building on the UNSDGs. The ICMA Social Bond Principles are voluntary guidelines that issuers may wish to follow in order to promote transparency in the social bond market, as well as to increase marketability to investors.
According to ICMAs Social Bond Principles, the main considerations for social bond designation include the use of proceeds; process for project evaluation and selection; management of proceeds; and reporting. The ICMA recommends that an issuer identify exactly how bond proceeds will address or mitigate a social issue and further identify the specific target population that will be benefited. The ICMA also recommends an issuer communicate the social objectives of the bonds and the particular category or UNSDG by which the bonds will be characterized. While the bonds are outstanding, ICMA guidelines also provide for careful tracking and management of the net proceeds, project descriptions, as well as regular reporting, including accountability as to the allocation of the proceeds in each stage of project development. A high level of transparency with respect to these components is critical to assuring potential investors that the bonds are used in accordance with the stated social objectives.
To further demonstrate credibility of the bonds and their impact on society, it may be beneficial to obtain an independent party's review and evaluation of the social bond designation. This may include obtaining a second party opinion from an institution with social bond expertise confirming that the bonds adhere to the Social Bond Principles or a verification report that verifies and substantiates the issuer's transparency and disclosure. These external reviews may help alleviate investor concerns of “social washing,” where bonds are designated as social bonds but the proceeds are used for something else.
Because the designation of social bonds is more of a “best practice” approach than a mandatory process, issuers seeking to designate their bonds as social bonds should thoughtfully plan the categorization, marketing and disclosure related to the bonds.