Social bonds have become a financial instrument to address social problems including access, inequality, and poverty to services. As the market for social bonds grows, the regulatory landscape is shifting toward transparency, accountability, and impact. 

The current trends in social bond regulations and their implications for issuers, investors and beneficiaries are discussed.

The Rise of Social Bonds.

You can simply call social bonds debt securities. They raise funds for socially beneficial projects. The proceeds of these bonds are specified for social projects. Some of these projects include affordable housing and healthcare. However, they can also focus on education and creation of jobs. The global social bond Market has grown in recent years. As a result, the issuance reached a record high of USD 164 billion in 2020. This number is clearly stated according to the International Capital market Association.

The growth of social bonds can be blamed on greater awareness of social issues. However, private capital requirements to support public initiatives and investor demand for socially responsible investments. Are also playing a major role. The COVID-19 pandemic has also spurred social bond formation. That’s because governments and organizations seek to finance programs that help vulnerable populations and economic recovery.

Regulatory Developments.

As the social bond market grows, regulators are considering guidelines and standards for issuance and reporting. The most important development here is the 2017 ICMA Social Bond Principles (SBP). The SBP defines a voluntary framework for issuing social bonds and includes guidelines for using proceeds, project evaluation and selection, managing proceeds and reporting.

The SBP has been adopted by issuers and investors as a language and understanding of social bonds. Nevertheless, the voluntary nature of the SBP has brought up questions concerning lack of comparability and standardization in the marketplace. In response, some regulators are contemplating more prescriptive regulations for social bonds.

For example, the EU is developing a social taxonomy in its Sustainable Finance Action Plan. The social taxonomy proposes a classification system for social investments similar to the EU's green taxonomy for environmental investments. The social taxonomy is expected to establish a more uniform framework for social bond issuance and reporting to improve market transparency and comparability.

Implications for Issuers and Investors.

The burgeoning regulatory landscape for social bonds will affect issuers and investors. Standardized frameworks such as the SBP and the EU social taxonomy may reduce the cost and complexity of issuing social bonds for issuers. Following established guidelines for project selection, management of proceeds and reporting can help issuers demonstrate their social impact ambitions and attract more investors.

But more prescriptive regulations could also create additional compliance costs. They also have the potential to create challenges for issuers. For example, the EU social taxonomy may mandate that issuers conduct more rigorous assessments of the social impact of their projects. This may increase the time and resources for issuance.

For investors, standard frameworks and regulations for social bonds could create greater transparency. They will also be able to experience better comparability in the market. These frameworks might help investors make better decisions about their investments. On top of that, the investors can compare the social impact of different bonds. They can do it by establishing a common language and understanding of social bonds.

But that does not necessarily mean investors will have to struggle with the new regulatory environment for social bonds. For example, lack of standardization in the market may prevent investors from comparing the social impact of different bonds across jurisdictions and sectors.

Implications for Beneficiaries.

The growing of social bonds has serious consequences for beneficiaries of social projects - especially low-income households, marginalized communities, and vulnerable populations. Social bonds can fund projects which might be otherwise awkward to fund, like affordable housing, healthcare, and education.

However, how social bonds impact beneficiaries depends on the performance of the funded projects and on the accountability of issuers and investors. Standardized frameworks and regulations for social bonds may help ensure that proceeds from such bonds are used efficiently to support social outcomes.

For example, the EU social taxonomy may require issuers to demonstrate social impact of their projects via standardized metrics and indicators. This could ensure that social bond proceeds are used for projects with measurable and positive effects on beneficiaries.

However, more prescriptive regulations for social bonds might also challenge beneficiaries. For example, standardized metrics and indicators for social impact adoption may not adequately capture all social outcomes that beneficiaries value including community empowerment and social cohesion.

Final Words.

The regulatory landscape for social bonds is evolving rapidly. It is creating a direct impact on issuers, investors, and beneficiaries alike. Standardized frameworks and regulations such as the SBP and the EU social taxonomy could foster transparency. Along with that, they can also support accountability, and impact in the social bond market.

However, more prescriptive regulations could also introduce additional compliance costs and challenges for issuers and investors and may not adequately capture the social outcomes that are relevant to beneficiaries. As the social bond market grows and changes, issuers, regulators, investors, and purchasers are going to need to collaborate to ensure that social bonds are now being utilized effectively and efficiently to provide social results.

Social bonds could potentially transform the lives of vulnerable communities and populations globally by providing a source of funding for projects which deal with pressing societal issues. When the regulatory environment for social bonds changes, it is going to be imperative to recognize this possibility in a transparent, responsible and effective manner.