Looking ahead – what trends do we expect in the corporate social and sustainable bond market?

In the final instalment of our series, we offer insights into the anticipated trends that will shape the corporate social and sustainable bond market, including evolving social priorities and investor preferences.

05 Jan 2024 . 4 min read

Over the last three years, issuances and volumes of social bonds experienced a substantial surge in response to the challenges posed by the Covid-19 pandemic. This also holds true for the corporate social and sustainable bond market: while not all corporate issuances in those categories related to the pandemic, the market has increased in issuance and volume since 2020 [1].

So, what lies in store for the corporate social and sustainable bond market? We expect three key trends to unfold in the years to come:

1. Rising investor interest in corporate debt with a social angle

While supply of corporate social bonds has been limited compared to corporate green bonds, a recent survey conducted by Goldman Sachs Asset Management indicated that nearly 65% of investors have a keen interest in allocating funds to social bonds. Of this group, 29% said they have already made investments, while 36% expressed a desire to explore investment opportunities in this category [2].

While the lack of available supply in social bonds could be a reason for the limited number of social bond funds we are seeing in the market, several large investors – including Columbia Threadneedle, Amundi, and AXA - setting up such funds. Nordea AM, for instance, launched a dedicated global social bond fund that specifically invests in labelled social bonds and debts issued by corporates [3].

Corporates interested in tapping into this demand do not necessarily need to issue “pure play” social bonds. Sustainable bonds, green bonds with clear social co-benefits, and even some intrinsically socially impactful corporate issuance can be appealing. Given, however, the less well-developed nature of this type of investing (versus green focused strategies) more investor engagement prior to issuance is recommended.

2. Social-focused regulation from the EU could be beneficial for corporate issuance

While ESG financial regulation is sometimes seen as a barrier, it can be as much a positive catalyst towards driving confidence in the asset class. As such, regulatory focus (particularly in Europe) on social metrics and reporting can be conducive towards further social-labelled supply, particularly as it moves from a “minimum safeguards” approach towards clear output metrics.

Corporates that start reporting under these frameworks may find it supports reporting around social impact, as well as identification of new socially impactful projects.

In the future, we anticipate measures to address “social washing” mirroring the proposed EU ban on greenwashing [4]. While the EU Social Taxonomy has currently been put on hold by the EU, investors and stakeholders in Germany and France are forging ahead with the development of social taxonomies, reviving efforts initially abandoned by the EU [5]. However, for now the increasing significance of the European Directives related to reporting (CSRD) and due diligence (CS3D) will play a greater role in enhancing the consideration of social issuances in the future as companies would be required to report on social issues such as, for example, their own workforce, and workers in their value chain.

3. More potential for social KPI-linked debt, particularly in private markets

For firms with insufficient social spend for a social or sustainable label, sustainability-linked (or KPI-linked) may be another route. This is likely more apparent for the loan and private placement (PP) market, noting the typical longer tenor for bonds (most social targets are shorter term) as well as limitations in the EUR sustainability-linked bond (SLB) market given the European Central Bank (ECB) excludes non-green SLBs from its programmes.

Sustainability-linked debt can equally address social issues and drive meaningful social improvement - and can be used by those companies that cannot gather sufficient eligible social assets but aim to improve their social performance. Sustainability-linked debt also offers room for corporate issuers to diversify and grow. As mentioned, targets that have been successfully included in sustainability-linked include gender diversity, and/or number of jobs supported, to name a few.

Thank you for taking the time to read this series, we hope you enjoyed the content. You can access all articles in this series via the links below, and for any questions you can reach out to the author, Niceasia Mc Perry.

Other articles in the series

References

[1] Calculated via data compiled on Dealogic

[2] https://www.gsam.com/content/gsam/uk/en/institutions/about-gsam/news-and-media/2023/social-bonds-survey.html

[3] https://www.funds-europe.com/news/nordea-launches-global-social-bond-fund

[4] https://www.europarl.europa.eu/news/en/press-room/20230918IPR05412/eu-to-ban-greenwashing-and-improve-consumer-information-on-product-durability

[5] https://www.responsible-investor.com/french-and-german-investor-groups-continuing-work-on-social-taxonomy/

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Looking ahead – what trends do we expect in the corporate social and sustainable bond market?

1. Rising investor interest in corporate debt with a social angle

2. Social-focused regulation from the EU could be beneficial for corporate issuance

3. More potential for social KPI-linked debt, particularly in private markets

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