Social bond proceeds are used to finance projects promoting better outcomes in the social sphere, such as access to essential services like healthcare and education, affordable housing, generating employment, improving food security and reducing inequality. They are often aimed at people living below the poverty line and in marginalised or underserved communities.

Social bond supply has stagnated despite strong demand among investors

Social bond issuance has stagnated since 2021, which was a fairly stellar year that saw roughly $300bn of issuance. Since then, issuance has averaged around $50bn per quarter. 

Total Green Social Sustainability and Sustainability-linked (GSSS) bond issuance in $bn

It’s unclear whether 2021 figures, driven by a reaction to the pandemic, will be repeated. But it doesn’t seem that lack of demand is the issue hindering the market’s growth. A 2023 survey of 700 investment professionals by Goldman Sachs Asset Management provided evidence of clear interest in social bonds – 65% of respondents already allocated to social bonds or planned to do so – but highlighted barriers to investing in them, including a shortage of opportunities and concerns about diversification.

Barriers to investing in social bonds

What’s going on?

Let’s look at some of the challenges currently facing the social bond market.

Europe is a major driver of this market from a geographical perspective, with nearly 38% issued social bonds denominated in euros, followed by US dollars (30%) and, somewhat surprisingly, Korean won (18%).

Governments and supranationals account for more than half of the origin of total issuance, with corporates only accounting for 18%, 14 percentage points of which are from financial institutions (primarily banks). This is clearly a key challenge, and it’s clear that for the social bond market to grow, it has to become more appealing to a wide selection of corporate issuers.

The market is also highly concentrated among issuers . For example, nearly 60% of all euro-denominated social bonds have been issued by just three entities – the European Union and two French bodies, CADES and Unédic. Similarly, more than half of the issuance in Korean won is from the Korea Housing Finance Corporation.

Many industries and sectors, such as healthcare, education and pharmaceuticals, are surprisingly almost absent from the social bond market, even though their remit is closely linked to social issues.

For environmental issues, greenhouse gas emissions are now an established measure of an issuer’s performance that is applicable, measurable and comparable for companies across industries, sectors and regions. But an equivalent indicator remains elusive for social factors. Social metrics are often more complex than environmental measures, and it can be difficult to determine the impact of specific factors on social outcomes – in the same way that emissions intensity can be clearly linked with technology adoption or process changes, for example.

What’s more, similar social issues often need to be measured differently across industries. For example, health and safety in hospitals is very different to health and safety in the mining industry. Defining appropriate measures to quantify social performance and measure impact across industries is a challenge that needs to be overcome if corporate social bond issuance is to be scaled up.

The sheer range of socially material issues that need to be funded can make it hard for issuing companies and investors to decide which to focus on. Major developments such as the pandemic and the Black Lives Matter movement were able to increase interest in the sector, but it is difficult to maintain attention at that level.

It’s not just social bonds that finance social projects – some green bonds report social co-benefits, as do around 15% of sustainability-linked bonds. Companies often choose to issue such bonds to finance social initiatives, which may explain the limited participation of corporates in the social bond market. But the range of social projects in question are generally focused on issues related to diversity and inclusion and the bonds often also finance environmental projects, making it difficult for investors looking to finance social issues alone. Thus far, the focus has been on green initiatives, to the detriment of social projects.

Standards and regulations could unlock the market

We don’t think that any of these challenges are deal breakers to increased social bond issuance by corporates. In our view the market’s stagnation is primarily due to a lack of global guidance and comparability of reporting standards.

Regulation could have a major impact on the social bond market’s future growth in this respect. For example, the EU’s Corporate Sustainability Reporting Directive (CSRD), which came into effect in 2023, requires EU businesses to disclose their environmental and social impacts and how their ESG actions affect their businesses.

Similarly, the Corporate Sustainability Due Diligence Directive (CSDDD) in Europe obliges companies to appropriate human rights and environmental due diligence. Many regulations and directives that are being discussed and implemented around the world could provide a significant boost to social bond issuance. 

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