Asset owners in Europe are keen to deploy more capital into social bonds but say they are challenged by limited opportunities.
European investors' exposure to impact investments, particularly social bonds, has been growing in the last year — in part due to new rules under the European Union's Sustainable Finance Disclosure Regulation, which became effective in March. Under the rules, regulators are steering pension funds' investments into assets with a specific environmental, social and governance impact in addition to requiring them to incorporate ESG factors into all other allocations.
Social bonds issuance was $249.6 billion in 2020, up from $22 billion in 2019, according to figures provided by the Climate Bonds Initiative, an international organization that works to mobilize capital in the bond market to help mitigate the effects of climate change.
The new SFDR rules around impact investing, known as Article 9, have been useful to focus investors' attention on their contribution to the United Nations' sustainable development goals such as access to health care or workers' rights. These concerns were also elevated to the top of investors' agendas because of the coronavirus pandemic.
But while pension fund executives said they are keen on boosting their social bond investments, they admit that unearthing opportunities is not straightforward. Investors, which are currently largely dependent on bond issuance by institutions such as the World Bank or more recently the European Commission, are on the lookout for more investment vehicles that can help them achieve scalable allocations as well as measure and report on the impact of these investments under the SFDR regulations. It is not an easy task because the social bond market is underdeveloped and it lacks frameworks such as the Task Force on Climate-related Financial Disclosures, which can aid investors in measuring impact of their investments and communicating them to plan participants, sources said.
Since these standards don't yet exist, the social bonds market hasn't reached a stage where impacts can be measured and communicated to plan participants, said Luba Nikulina, global head of research at Willis Towers Watson PLC in London. "When you issue a social bond, how do you make sure that commitments that you are making ... are genuinely improving social issues … and (that) they don't have unintended consequences in certain geographies?" she said.