Next-Finance : What is the current size of the social bond market? How has it evolved in recent years? Has Covid-19 had an impact on this market?

Tammie Tang and Simon Bond : The social Bond market is over $500 Trillion in size. The ICMA (International Capital Market Association) Social Bond principles were launched in 2017, following the launch of the ICMA Green Bond principles in 2015. However, the growth of the social bond market, and over 90% of issuance to date, has occurred only in the last 3 years and immediately following Covid-19.

Do you have any examples of newly issued bonds to fight the pandemic?

Pandemic Response bonds were quickly issued to raise funding to address the pandemic during 2020. These included issuers such as the European Union, World Bank and International Finance Facility for Immunisation. More recently, bonds have been issued to address another key social issue. The social displacement caused by Russia / Ukraine war. We’ve seen issuers such as Council of Europe issue over $2 Billion in bonds to support funding to member countries who have taken in the millions of Ukrainians fleeing the war. The bonds support host countries fund shelter, healthcare and transport.

Can you remind us of the role of INCO, the consortium focused on the social economy in Europe, in the management of the fund?

INCO is an investment organisation specializing in companies with a strong social and environmental impact. Thanks to its expertise and independence, its role is to advise us about the assessment of the social impact of the bonds subscribed in the Threadneedle (Lux) European Social Bond Fund portfolio and to hold us to task in our delivery of social good, or social alpha.

INCO reviews, advises and challenges the social intensity of each investment made by the fund. INCO is an investment firm with nearly a decade-long track record investing in socially inclusive and environmentally sustainable enterprises with compelling financial returns.

INCO acts as an independent advisor of the Fund, providing its expertise in the field of social and environmental evaluation. They are responsible for researching and assessing the social outcomes of investments made in the European Social Bond Fund on a post-trade basis, as well as forming part of the Social Advisory Panel to review, advise and monitor the fund’s investments from a social performance perspective. They also produce the annual impact report for the Fund. This partnership shows a common desire to support organisations that make a positive change in their community, whether they are companies, local authorities or non-profit organisations.

How do you select the securities in the portfolio?

The fund has a dual objective of financial return, by that of income and capital appreciation through investments that are deemed to be supporting and funding socially beneficial activities and development, primarily in the EU, and social alpha by investing in bonds issued by organisations that deliver clear social outcomes. Therefore, securities are selected based on their ability to support both objectives. The social impact of any security is evaluated by assessing the social outcome areas, the population or region supported and the extent of additionality provided by the bond. The Fund seeks to encourage the market for bond issuance among organisations that aim to deliver social outcomes. The two key parameters of traditional investing are financial risk and financial return. This portfolio adds a social impact dimension, through targeted social objectives that we categorise, rate and analyse systematically.

Do you set investment limits by social theme?

Explicit limits are not set by social theme. Rather, the ‘social intensity’ of each investment will be informed by the social outcome areas that any single bond targets. Our assessment of social intensity will give greater importance to more importance outcome areas, such as basic social needs (such as housing, healthcare) over more secondary social needs (such as education and access to infrastructure). Prior to any investment, our dedicated impact analyst considers the bond in question and gives a preliminary view of eligibility for the Fund. Where there is minimal social or socio-economic benefit or failure to meet the minimum requirements, or where we see material ESG or reputational issues which risk negating positive social outcomes, an indication of ineligibility may be assigned.

What type of investors are interested in your fund?

More and more investors are looking to invest their savings in ways that promote social progress and achieve sustainable positive outcomes. At the same time, we believe that investors do not need to sacrifice performance to achieve social impact.

As a consequence, all types of investors are interested in our product: from private individuals to leading investors such as pension funds and insurance companies.

Investors in the fund are those interested in enabling positive social outcomes. Investors are keen to see how the bond market can play a role in addressing the large inequalities in society. The bond market, through its ability to ring-fence proceeds, can be targeted in the social outcomes and populations supported by the bond proceeds.

Furthermore, the fund is carefully managed with a mix of maturities to offer daily liquidity. Frequently, impact investment and other social impact vehicles must tie up money for long periods. Furthermore, the risk profile can be challenging to understand. The European Social Bond Strategy, by contrast, offers a corporate bond strategy type risk and aims for a corporate bond return, making it accessible and understandable to a wide range of investors.

How is the fund classified under the SFDR regulation?

The fund is currently classified as Article 8, with near term plans for Article 9. The pure impact and sustainability focus of the fund gives alignment in principle to Article 9. As a firm, we have been keen to ensure careful interpretation of Article 9 requirements and have not rushed into immediate Article 9 classification. However, the European fund has just received confirmation of Belgium Febelfin label, which we believe is encouraging towards Article 9 designation.

Is there any impact reporting and what have been the main actions carried out thanks to your investments?

The Fund provides annual impact reports which is produced by our social partner INCO and in terms of social highlights the fund’s financing has contributed to:

• The development of 221,000 social homes
• Funding residential businesses with over 5,800 lower cost homes
• Allocating over €2.67 billion to advanced nutrition and global health priorities
• Benefiting circa 22 million people via water and food security projects
• Funding or employing at least 51,000 health researchers and scientists
• Supported micro, small medium, or women led enterprises. These created and retained over 530,000 jobs and made supporting services available to 151,000 farmers

One last question: Simon, you recently announced your intention to retire in 2023, what next?

Simon Bond: Whilst I am retiring from fund management I will not in all likelihood be retiring from Impact or Social as evidenced by my extended role with the Social Advisory Committees, that said I do plan to pick up my studies again (I am half way through a master degree in Naval History at Portsmouth University) spend some time sailing (including further study of celestial navigation) and watching more Cricket and Football matches both at home and abroad.

Tammie Tang: We’re grateful to Simon for pioneering our social bond strategies. Although Simon is retiring from fund management, beyond 2023 Simon will still be involved in advancing and advocating social impact, including through continued involvement in industry initiatives as well as involvement in the European Social Bond fund, by continuing as an independent committee member.