For corporate social bonds, SLBs are way to go
Social bonds have long been the poor cousin of green bonds. A smaller, less well organised market.
The Covid pandemic changed that in 2020. Social bond issuance grew exponentially. “Green is dull now — it’s all about social,” said a bonds banker this week.
Social bonds do not change the world. They draw investors’ attention to activities the issuers were doing anyway, and let the investors feel they are helping. But they do raise consciousness of ethical issues in capital markets.
Governments — from the EU to local authorities — and banks, both public and private, have huge scope to issue social bonds. The wallflower is the corporate sector.
But companies have huge social impacts — this is where markets have most scope to change things for the better.
This week Motability, the UK company that leases cars to disabled people, issued its first social bond.
Few other companies will find it so easy. Many sell a useful product — like telecoms or food — but how much of that is truly socially progressive? And how much investment is needed for that specific element?
Novartis showed a better path in September. The Swiss pharmaceutical group has targets to help more people in poor countries with its therapies. It agreed to pay a coupon step-up if it fails.
This sustainability-linked bond structure removes any irrelevant restriction, arising from how much it will cost to carry out this improvement. What matters is whether Novartis succeeds.
An SLB can lift a social improvement target out of the unread pages of a CSR report and give investors and issuer a clear, financial reason to pay attention to it. It is a genuine and versatile way for the bond market to encourage social progress.