The debt market is increasingly keen to integrate social themes, which is being spurred by pressing social and environmental challenges, such as climate change and socioeconomic inequalities. Despite the obstacles that the social bond market has faced, the direction of travel is clear: social bonds and social impact consideration are here to stay, driven by demand from investors and asset owners with social objectives in their portfolios.

Investors need to be able to understand the impact that their investments create in as detailed a way as possible. Therefore, it is helpful for issuers to highlight any social themes that their issuance may be addressing, such as financial inclusion, affordable housing, digital inclusion, just transition, improving healthcare solutions and others.

The growing importance of integrating social considerations into environmental finance is behind the theme of “just transition” which ensures that the shift towards a low-carbon economy does not disproportionately harm vulnerable communities. While the energy transition offers opportunities, it also poses risks such as job losses in high-emission industries. Engaging with issuers to incorporate social impact into transition strategies is becoming a priority for investors.

As investors increasingly look beyond the label and incorporate social aspects into the investment decision making process also for green or conventional bonds, it may be worthwhile to incorporate social indicators into green bond reporting. Some of the social co-benefits indicators frequently used in the market include the number of jobs created due to deployment of renewable energy production, but there is potential to provide a more holistic picture of the impact also for other green categories, for example in case of water investments, the number of people with access to clean drinking water. More guidance can be sought in the ICMA Harmonised Framework for Impact Reporting Handbook.  

Issuers are advised to provide thorough impact reporting to investors, including not only the relevant impact indicators but also disclosing the methodology and assumptions used to arrive at these results. Therefore, it is important to incorporate future reporting already at the stage of creating the social bond framework, basing on the data that is going to be available to the issuer and taking into account investor needs for specific categories. It is worth bearing in mind the data preferences whilst upgrading internal systems too - investors appreciate depth and granularity of the data provided.

Last but not least – social impact reporting should allow the reader to look beyond the numbers and hear the voices of communities who benefit from funding and so it is helpful to include case studies to allow the reader of the report to visualise and contextualise the impact metrics.

Whilst stricter regulations are generally perceived to be a constraint rather than an enabler for economic activities, the opposite may just be true with regards to the social bond market. Setting clear guidelines around what activities are considered to have positive social impact along with expectations with regards to how the impact is going to be measured could provide a boost to market confidence, similarly to what the implementation of the EU Taxonomy achieved for the green bond market.

Frontrunners include evolving regulations, such as the Corporate Sustainability Due Diligence Directive (CSDDD), which integrates social issues like human rights considerations further into company operations and strategy, promoting transparency and accountability.

It’s no understatement to say that the social bond market is at a critical juncture. Better standardisation, improved impact reporting, and aligning social and environmental factors are needed to scale the market and meet investor demand. And the key to attaining this is alignment of objectives across issuers, investors, and regulatory bodies.