Highlights:

• Mounting social tensions fuelled by war and climate events on the one hand and the desire of investors to invest in sustainable assets on the other, have sparked the rapid growth of social bonds in recent years.
• In this report, we take a deeper look into this relatively new asset class, its different types, and potential ways to address ‘social washing’. We briefly discuss the ICMA’s social bond approach and the elusive path to an EU social taxonomy, which is not without controversy even within the EU, and compare them to the yardsticks of the better established EU green taxonomy.
• The social bond segment is dominated by European issuers and the bulk is denominated in euro. Most issuers belong to the government sector, which results in a rather high median AA rating. In a case study on EU securities, we show that social bonds have similar characteristics to conventional bonds, especially in terms of yield level and volatility. This opens up the possibility for investors to buy labelled bonds without a yield penalty – and still have an information advantage compared to conventional bonds due to the reporting requirements.
• Despite the strong growth, the social bond segment is significantly smaller than the green bond one. Going forward, we expect demand for social bonds to remain high. The main issuers will likely remain government-related entities. On the private side, financial issuers will continue to dominate.
• Our analysis shows that social bonds have no significant yield disadvantage compared to conventional bonds. However, given potential controversy risks, a preceding in-depth analysis seems indispensable. Moreover, as in any sustainable investment, conflicting signals may arise when an issuer’s “E” and “S” scores differ. This trade-off cannot be resolved and we assume that investments in social bonds are made subject to the observance of minimum environmental safeguards.

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