It depends on the pulse.
Change. More and more social bonds are being issued to provide capital to solve social problems. "Investors should thus achieve a social return in addition to the financial one," explains Simon Bond, bond expert at Columbia Threadneedle. "For this to really work, however, the benefits of the projects must be analysed very carefully."
"Actually," ponders Simon Bond, bond expert and manager of the Columbia Threadneedle Social Bond Fund, "the Corona Pandemic is something of an accelerator for the social bond market." A lot of capital is now needed worldwide to improve healthcare systems and to get the social consequences under control. Many organizations and governments are likely to raise this money by issuing social bonds.
For example, the International Finance Corporation (IFC), which is part of the World Bank, raised one billion dollars for corona aid programmes at the end of March. It intends to use the proceeds of the issue to finance projects that give people in developing and emerging countries better access to health services. At the same time, the IFC guarantees coupon payments of 0.5 percent per annum and repayment of the security after three years. "This offers investors an interesting investment. They receive a return that is roughly equivalent to that of first-class government bonds in the respective currency and can be sure that their money has a positive social impact," Simon Bond points out.
The IFC bond is one of many issues in this area. At the end of March, the Free State of Bavaria placed a bond with a record volume of three billion euros to help Bavarian companies cope with the economic consequences of the Corona pandemic. Various development banks and the European Investment Bank (EIB) also issued securities worth billions of euros.
The basic idea for such social bonds has been around for quite some time. They differ from normal fixed-interest securities in one important respect. "The proceeds may only flow into pre-defined projects, and the issuer must also provide evidence of this use," explains Bond. So far, the market has a volume of around 59 billion dollars. Experts expect the volume to grow by 25 billion dollars in 2020, even before the Corona crisis. But now it could be even more. This is good news for Simon Bond, as it gives him greater choice and even more diversification opportunities for his social bond fund.
In selecting the securities, the expert proceeds in a two-stage process. "It starts with a very thorough financial analysis of the issuer. After all, it doesn't help to support the greatest social project with such a bond if the issuer then goes bankrupt. In that case investors would not only lose their money. The expected social impact would not be there either.
Once this topic is checked off, the real work begins. "For us, it is crucial that the proceeds from a bond really do create an additional benefit for the company," says Bond. However, this is by no means the case for all securities that are listed under the category "social".
The challenge: "When defining the objectives, most issuers are guided by one or more of the 17 sustainability goals of the United Nations. However, in very general terms the aim is to enable a dignified life and to preserve the natural foundations of life. The projects are correspondingly vague. If we analyse this closely, we often cannot identify any measurable social benefits."
In order to avoid this, the bond expert not only orients himself to the 17 overarching intentions, but also uses the 169 concrete targets behind them. Number ten in the UN catalogue, for example, includes the reduction of inequality. "This is too vague for me. A more concrete goal, on the other hand, is to achieve and maintain income growth above the national average for the poorest 40 percent of the population by 2030. If that's what the launch of a bond is all about, the social impact can be much better assessed and measured."
In their analysis process, Bond and his colleagues therefore first define a social bond universe. In doing so, they exclude all bonds that could have a negative impact or where only minimal social benefits can be expected. Securities from sectors such as automobiles, advertising, securities trading, coal, nuclear power, alcohol, gambling or weapons are taboo. "We look closely at how ESG criteria - i.e. environmental and social issues and aspects of good corporate governance - are taken into account. As a rule, we also avoid companies that are involved in controversies over environmental pollution because climate change is having a negative social impact".
This is followed by an in-depth analysis of the social impact in cooperation with INCO, a research company specialising in social issues. "We not only want to know exactly which projects the proceeds of the issue will be used for, but we also estimate the effect ourselves. This process results in a social score for each paper, which allows us to compare bonds that also address different social needs," Bond continues. The score goes up to a maximum of 31, with bonds with a rating of 21 to 31 points usually being added to the portfolio. The next step is to monitor the individual projects and - if necessary - to seek dialogue with the issuers. "This is the only way we can achieve our goal," concludes Simon Bond, "of ensuring that investors will actually receive the social return as well as the financial one.
// How to invest - in Social Bonds.
As early as 2017, Columbia Threadneedle launched the Threadneedle (Lux) European Social Bond Fund (ISIN: LU1589836722), which focuses on European social bonds. It invests in the 200 or so bonds that achieve the highest social score in Threadneedle's research process. When buying bonds Simon Bond concentrates primarily on new issues because he sees a valuation advantage there. The average coupon is 1.5% and the fund's yield to maturity is 1.24%. The average credit rating of the portfolio is in the single A range.
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