Social Bonds: Financing Positive Social Outcomes

What is a Social Bond?

A social bond is a fixed-income financial security that raises capital specifically for projects that address social issues or generate positive social outcomes. Like conventional bonds, social bonds are issued by governments, multinational institutions, or corporations as debt instruments with regular interest payments and principal repayment at maturity. The distinguishing feature is their dedicated use of proceeds—social bonds exclusively finance projects with explicit social benefits, particularly for specific target populations such as underserved communities, low-income groups, or vulnerable populations.

The definition of a social bond has been formalised by the International Capital Market Association (ICMA) in its Social Bond Principles. According to ICMA, social bonds are "any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects and which are aligned with the four core components of the SBP." These projects must directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes for targeted populations.

The Social Bond Fundamentals

Following the template established by green bonds, social bonds maintain the same core framework while focusing specifically on social rather than environmental objectives.

Financial Structure

Social bonds maintain the familiar financial characteristics of traditional bonds:

• Fixed interest rates paid on a regular schedule
• Predetermined maturity dates
• Typically structured as senior unsecured debt (though secured structures exist)
• Credit ratings based on the issuer's financial standing
• Secondary market trading similar to conventional bonds

The key distinction lies not in their financial structure but in their social mandate and the additional transparency requirements around how proceeds are used to benefit specific target populations.

Core Framework Components

Following the established template of labelled bonds, social bonds adhere to four essential elements:

1. Dedicated Use of Proceeds: Funds must exclusively finance eligible social projects that provide clear social benefits to identified target populations
2. Project Evaluation and Selection: A transparent process must exist for determining project eligibility and identifying beneficiary populations
3. Segregated Proceeds Management: Bond proceeds must be tracked separately and allocated to designated social projects
4. Regular Reporting: Issuers must provide annual updates on proceeds allocation and social impact, particularly on beneficiary populations

These components, formalised in the ICMA Social Bond Principles, ensure that social bonds maintain the same level of rigour and transparency as green bonds, while focusing on social rather than environmental outcomes.

Self-Labelled Nature

Like other labelled bonds, social bonds operate on a self-labelled basis. The issuer determines whether its bond qualifies as a "social bond" based on alignment with accepted market standards. This flexibility allows issuers to tailor their approach while creating the need for:

• External reviews from third-party verifiers to confirm alignment with principles
• Clear articulation of target populations and expected social benefits
• Enhanced scrutiny from investors regarding social impact credentials

This self-regulation approach continues to evolve as market expectations for rigour and credibility increase across the sustainable finance landscape.

The Evolution of Social Bonds

Building on the foundation established by green bonds, social bonds emerged as financial instruments specifically designed to address social challenges. The market has grown substantially:

• From early pioneers primarily among multilateral development banks to diverse corporate and sovereign issuers
• Acceleration during the COVID-19 pandemic as governments and institutions issued bonds to finance healthcare and social safety net responses
• Expansion beyond financial institutions to include healthcare, education, and housing sector issuers
• Growing alignment with the United Nations Sustainable Development Goals (SDGs), particularly the socially-focused goals

This evolution reflects growing recognition that addressing social challenges requires dedicated financing tools and frameworks, with rigour and transparency comparable to environmentally-focused instruments.

Types of Social Bonds

The market has developed various structural approaches to social bonds, mirroring those established for green bonds:

1. Standard Social Use of Proceeds Bond: The most common structure, where proceeds finance social projects while the bond remains a general obligation of the issuer
2. Social Revenue Bond: A non-recourse debt obligation where repayment comes from specific revenue streams, fees or taxes
3. Social Project Bond: Issued specifically for a single or multiple social projects, with investors directly exposed to project risk
4. Secured Social Bond: A bond secured by specific assets, which may include the financed social projects or other collateral

These variations provide flexibility for issuers with different needs and credit profiles while maintaining the core social bond principles.

Eligible Project Categories and Target Populations

Social bonds finance projects across diverse categories that address specific social challenges or create positive social outcomes:

Project Categories

• Affordable basic infrastructure: Clean drinking water, sanitation, transport, energy
• Access to essential services: Healthcare, education, financial services, digital connectivity
• Affordable housing: Social housing and other affordable residential structures
• Employment generation: Programs addressing unemployment, including SME financing
• Food security: Improving access to safe, nutritious and sufficient food
• Socioeconomic advancement: Equitable access to services, resources, and opportunities

Target Populations

The 2023 edition of the Social Bond Principles emphasises the importance of clearly identifying relevant target populations, which may include:

• People living below the poverty line
• Excluded or marginalised populations and communities
• People with disabilities
• Migrants or displaced persons
• Undereducated individuals
• Underserved populations lacking access to essential goods and services
• Unemployed people and workers affected by climate transition
• Women and sexual or gender minorities
• Aging populations and vulnerable youth
• Other vulnerable groups, including those affected by natural disasters or climate change

The specific definition of target populations may vary depending on local contexts, and in some cases, the general public may be served if addressing broader social needs.

The Social Bond Principles

The ICMA Social Bond Principles (SBP) serve as the primary market standard, providing voluntary guidelines focused on transparency, disclosure and promoting market integrity. The SBP framework includes:

1. Use of Proceeds: Clear social benefits should be described in legal documentation, with project categories identified and target populations specified
2. Process for Project Evaluation and Selection: Issuers should outline social objectives, project eligibility criteria, and risk assessment processes
3. Management of Proceeds: Proceeds should be credited to sub-accounts or tracked through formal internal processes, with unallocated funds placed in temporary investments
4. Reporting: Annual reporting on proceeds allocation and social impact is expected until full allocation, with particular emphasis on the benefits delivered to target populations

The 2023 edition of the SBP includes references to "just transition" considerations, clarifies requirements around target population identification, and provides guidance on managing potential negative social and environmental impacts.

Impact and Importance of Social Bonds

Social Impact

Social bonds mobilise capital for projects with tangible social benefits:

• Improved access to essential services for vulnerable populations
• Enhanced affordable housing supply
• Increased employment opportunities for underserved communities
• Greater food security for vulnerable populations
• Expanded basic infrastructure in underserved areas
• Reduced socioeconomic inequalities

The impact reporting aspect of social bonds provides quantifiable metrics that help investors understand the social outcomes of their investments, particularly in terms of population reach and depth of impact.

Market Impact

Beyond individual projects, social bonds have catalysed broader sustainability trends in financial markets:

• Raising awareness about social finance among mainstream investors
• Creating mechanisms for transparent social impact reporting
• Establishing pricing benchmarks for socially-focused investments
• Building investor capabilities for assessing social criteria
• Demonstrating market demand for socially-focused financial products
• Enhancing funding for socially beneficial projects that may be overlooked by traditional financing channels

Benefits for Issuers

Organisations issue social bonds for numerous strategic reasons:

• Diversifying investor base: Attracting investors focused on social impact considerations
• Strategic signalling: Demonstrating commitment to social responsibility objectives
• Stakeholder engagement: Creating dialogue with local communities and beneficiary groups
• Long-term holding: Social bond investors typically maintain longer holding periods
• Supporting social strategy: Aligning financing with corporate social responsibility goals
• SDG alignment: Demonstrating contribution to socially-focused Sustainable Development Goals

Common Questions About Social Bonds

What is the difference between a social bond and a sustainability bond?

The key distinction lies in the focus of their use of proceeds:

• Social bonds exclusively finance projects with social benefits, such as affordable housing, access to essential services, or employment generation.
• Sustainability bonds finance a combination of both green and social projects, addressing both environmental and social objectives simultaneously.

While both follow the same structural principles and core components, social bonds maintain a singular focus on socially beneficial projects and target populations, whereas sustainability bonds have a broader mandate spanning both environmental and social dimensions.

Do social bonds receive pricing advantages similar to green bonds?

The evidence for a "social premium" (similar to the "greenium" for green bonds) is less conclusive than for green bonds. While some social bonds have achieved marginally lower yields than conventional equivalents, the pricing advantage is generally less pronounced than for green bonds. This may be due to:

• The relatively smaller size of the social bond market compared to green bonds
• The nascent stage of investor specialisation in social impact
• Challenges in quantifying and standardising social impact metrics compared to environmental metrics
• Varying investor perceptions of social and financial materiality across different social categories

The pricing dynamics continue to evolve as the market matures and as investor understanding of social impact deepens.

How do social bonds differ from philanthropic funding?

While both social bonds and philanthropy aim to address social challenges, they operate through fundamentally different mechanisms:

• Financial returns: Social bonds are investment instruments that provide market-rate returns, while philanthropy typically involves grants without financial return expectations.
• Scale and repeatability: The bond structure allows for mobilising significantly larger amounts of capital that can be recycled as bonds mature and new ones are issued.
• Market discipline: The bond framework introduces market rigour and accountability through regular reporting and investor scrutiny.
• Sustainability: By generating financial returns and repaying principal, social bonds create a sustainable funding model that can complement philanthropic resources.
• Mainstream investor participation: Social bonds enable conventional fixed-income investors to contribute to social outcomes through their standard investment activities.

Social bonds effectively build a bridge between traditional financial markets and social impact, creating a complementary tool to philanthropic approaches.

How are social outcomes measured and reported?

Social impact measurement presents unique challenges compared to environmental metrics (like tonnes of CO₂ avoided). The Social Bond Principles recommend that issuers:

1. Use both qualitative and quantitative indicators: For example, number of beneficiaries served (quantitative) alongside descriptions of quality improvements (qualitative)
2. Focus on outputs and outcomes: Report both direct outputs (e.g., number of affordable housing units built) and outcomes (e.g., percentage reduction in housing insecurity)
3. Clearly identify target populations: Specify which vulnerable or underserved groups benefited from the projects
4. Disclose methodology: Explain the assumptions and approaches used in impact calculation
5. Use standardised metrics where possible: Refer to the Harmonised Framework for Impact Reporting for Social Bonds developed by ICMA

The social bond market continues to develop more sophisticated impact measurement approaches, with increasing standardisation of metrics across similar project categories.

What is the relationship between social bonds and social loans?

Social bonds and social loans share similar principles but operate in different market segments:

• Social bonds are publicly or privately issued debt securities available to a broad range of investors through capital markets.
• Social loans are bilateral or syndicated loan agreements between borrowers and lenders (typically banks) that follow the Social Loan Principles.

Both instruments maintain the same core focus on financing projects with positive social outcomes, with similar requirements around use of proceeds, project evaluation, proceeds management, and reporting. The choice between them typically depends on the issuer's size, market access, funding needs, and investor relationships.

How do social bonds address "just transition" considerations?

The 2023 edition of the Social Bond Principles explicitly references "just transition" considerations, acknowledging the social dimensions of climate action. This includes:

• Recognition that climate transition projects may cause or exacerbate socioeconomic inequities if not properly managed
• Inclusion of "unemployed and/or workers affected by climate transition" as a specific target population
• Emphasis on employment generation programmes designed to prevent and/or alleviate unemployment stemming from climate transition
• Guidance on identifying mitigants to potential negative social impacts

This integration of just transition considerations reflects growing awareness that environmental and social dimensions of sustainability are deeply interconnected, with climate policies potentially having significant social implications that require dedicated financing solutions.

The Future of Social Bonds

The social bond market continues to evolve in several important directions:

• Standardisation of impact metrics: Development of more consistent approaches to measuring and reporting social outcomes across different project categories
• Enhanced additionality focus: Greater emphasis on demonstrating that social bonds finance projects that would not otherwise receive adequate funding
• Integration with sustainability strategies: Closer alignment between social bond frameworks and issuers' broader sustainability commitments
• Regulatory developments: Potential emergence of social taxonomies similar to the green taxonomies being developed in various jurisdictions
• Technology integration: Leveraging digital tools for more granular impact tracking and verification
• Emerging market growth: Expansion in regions where social challenges are most acute and where innovative financing solutions are most needed

As sustainable finance evolves, social bonds will remain an essential instrument for channeling private capital toward addressing critical social challenges, complementing the role of green bonds in the transition to a more sustainable and inclusive economy.

This article is the third in our series exploring the labelled bond universe. Read our first article on green bonds and second article on sustainability bonds, and watch for upcoming features on transition bonds and sustainability-linked bonds.