In a year marked by turmoil and uncertainty, one hopeful theme that has emerged is the growing demand for a more equitable and inclusive society. Investors in responsible investing strategies have the ability to effect systemic change by directing capital toward projects with the underlying objective of making a positive impact on society.
Investors in the municipal bond market in particular can invest in many projects that are crucial to local communities. The muni market offers the ability to invest in socially impactful projects using a vehicle called a social bond. Let’s look at how sustainability-minded fixed income investors can get the most out of this innovative vehicle.
What are social bonds?
Green bonds, which are bond issues with an underlying environmental or sustainable purpose, have been issued in the municipal bond market since 2013, when Massachusetts issued the first green-labeled municipal bond. Social bonds, which are newer to the municipal bond market, are defined as “bonds with a use of proceeds for new and existing projects with positive social outcomes.” Some of the issue types within the municipal market that are eligible for this label include bonds for affordable basic infrastructure, such as clean drinking water, clean transportation, and clean energy projects; bonds for essential service access, such as health care and education; bonds for socioeconomic advancement and empowerment; and bonds for affordable housing projects.
State and local governments can use social bonds to finance and refinance capital projects. The Massachusetts School Building Authority brought a social bond to market in June, issuing over $1.4 billion in bonds under this designation. This issue qualifies as a social bond by seeking to establish “equitable quality education” and improve social outcomes for those in the Massachusetts public school system.
Social bonds have also allowed nonprofit foundations to access the public bond market and continue their philanthropic work during a time when charitable donations from corporations and individuals might be less reliable. The Ford Foundation issued the first social bond by a nonprofit foundation earlier this year, and the issue was designated as such by Sustainalytics, a second-party verifier, under the category of socioeconomic advancement and empowerment. The net proceeds will be used toward “building resilience in the nonprofit sector and stabilizing and strengthening key nonprofit organizations essential to reducing inequality, so that they are in a position to advance just, inclusive, and equitable recovery efforts following the COVID-19 pandemic.” Investors in this issue are providing access to capital to one of the largest nonprofit foundations in the United States, which issues grants to numerous organizations focused on the goals of reducing poverty, inequality, and injustice.