ESG investor NN Investment Partners has launched a new social impact bond fund to invest in projects with social benefits for specific populations and is predicting issuance of €250bn this year in the area.
NN IP described social bond issuance as "one of the fastest-growing segments of sustainable investments" as it funds social development and helps investors to align their portfolios and financial objectives with the social targets of the UN’s Sustainable Development Goals.
“In 2022, we expect an issuance of €250bn. Our outlook for growth opportunities is positive,” said Bram Bos, lead portfolio manager green, social and impact bonds at NN IP.
Social bond issuance has dropped markedly amid a wider market slowdown following Russia’s invasion of Ukraine after reaching US$164.8bn in 2020 and US$191.95bn in 2021 when the instrument was used to fund social projects relating to the pandemic, according to Refinitiv data.
Only US$58.7bn of social bonds have been issued in 2022 to-date, which is 59.3% lower than over the same period last year. In the second quarter, US$23.15bn of deals were issued, compared with US$48.9bn a year earlier, the data show.
Total outstanding social bonds now total €400bn according to NN IP, which remains bullish on volume despite the recent slowdown. The firm sees social bond issuance picking up towards the end of the year and thinks that spiralling energy costs due to the war in Ukraine could accelerate social bond issuance.
"This year has turned out to be one of the worst starting years in terms of performance for fixed income ever. A lot of issuance is postponed because of the uncertainty in the markets, but it is likely there will be more issuance in the second half of the year and also into next year," Bos said.
There are currently only a handful of social bond funds in Europe. Amundi launched its Social Bond Strategy fund in December 2020, and Columbia Threadneedle has been running a £260m social bond fund since 2014, but NN IP expects more asset managers to issue social bond funds.
Investment strategy
The NN (L) Social Bond fund will invest in debt issued by companies, governments and quasi-sovereign entities and is starting at €20m, but the "dark green" Dutch investor expects it to grow quickly.
"We do feel there's a lot of interest for social bonds so in one year from now the fund should be north of €100m, but in the long term, this could really become a very large fund," Bos said.
It will align with ten of the UN SDGs that have social goals and target deals that promote affordable basic infrastructure such as water and sanitation, access to essential services in education and health, affordable housing, employment, food security, and socioeconomic advancement and empowerment.
It will be classified as an Article 9 fund under Europe’s Sustainable Finance Disclosure Regulation, which has sustainable finance as its objective, and will be managed as an impact fund by NN IP, along with four green bond funds that have more than €5bn of assets under management.
The fund will invest in global social bonds and euro-denominated money market instruments rated AAA to BBB–, and can also include sustainability bonds (a mix of green and social) that allocate at least half of the proceeds to social projects.
While the benchmark is euro-denominated, the fund can invest up to 30% in social bonds in other currencies, as NN IP is expecting the asset class to increase globally. It will only invest in social bonds that are labelled as such and are aligned with ICMA’s social bond principles.
“We really see very strong indications that social is becoming a more global theme and we're going to see more issuances in other parts of the world," Bos said.
The fund will be managed against an IBoxx social bond index with issuer-level ESG screening and a social bond impact report. NN IP will also engage with issuers to prevent "social washing" that exaggerates the ESG characteristics of deals.
“We look beyond the standard labelling,” said Roel van Broekhuizen, portfolio manager green, social and impact bonds at NN IP.
NN IP believes that social bonds can expand the impact of conventional and ESG fixed income portfolios alongside green bonds without any additional credit risk as more investors switch to ESG deals, and expects the market to follow a similar growth trajectory to green bonds.
“We are seeing for sure in the last few years more and more investors replacing conventional fixed income with green or social bonds. It’s easy to do, it’s liquid and it has the same risk-return characteristics,” Bos said.