Nearly two thirds of institutional investors in Europe are already invested in social bonds or are planning to do so, according to a new report from Goldman Sachs Asset Management (GSAM).
The survey canvassed over 700 investment professionals across 11 key European markets. The respondents included chief executive officers, heads of environment, social and governance (ESG) investing and portfolio managers from insurers, pension funds, banks, charitable foundations and family offices.
The report found that three in 10 already invested in social bonds, and another 36% said they were interested in doing so.
The main reasons for investing in social bonds were the potential social impact and a commitment to sustainability.
These percentages are “remarkably high”, says GSAM managing director and portfolio manager Bram Bos. “I had expected slightly fewer investors to be invested in this asset class already, because the market for social bonds is still relatively small with few investors having a separate allocation to the category, as is usually already the case with green bonds.”
In the Netherlands, only a handful of (large) pension funds, including ABP, Bpf Bouw and PFZW, have separate allocations to social bonds. Other funds have integrated the investment category into existing green bond mandates, according to Bos.
GSAM said, social bonds are a relatively new asset class, although a rapidly expanding one reaching €464bn by the end of 2022.
This means the market for social bonds is now almost comparable in size with its green bond counterpart
However, it is not as mature as green bonds and issuers are limited almost exclusively to European governments and financial institutions with the European Commission being by far the largest. Corporates are yet to issue social bonds.
In addition, proceeds from the issuance of green bonds are generally used to finance the energy transition whereas, social bonds aim to achieve social goals, such as improving working conditions or reducing inequality.
One example is the so-called “Covid bond” the EU issued in 2020 to preserve jobs that were at risk as a result of the coronavirus crisis.
He added,“We now have a number of mandates that include 5-10% of exposure to social bonds. We do not yet have any pure social bond mandates.”
As to the social themes that can be advanced through social bond investing, the most popular cited in the survey was access to affordable basic infrastructure, such as clean water, followed by food security and sustainable food systems.
By comparison, less than 12% of respondents had no preferred social theme, indicating investors in the asset class have a clear impact agenda.
The report found that the social groups investors most wanted to help through social bond investing were ‘underserved’ people with a lack of access to goods and services followed by people with disabilities.
Only 11.8% indicated they want to target women and gender minorities for help. Bos said he did not know why this was the case.
In terms of challenges to investing in these bonds, the survey pointed to a perceived shortage of products offering exposure to the social bond as the number one of the list of impediments.
The level of diversification was also seen as an issue.
“At present, only a small number of managers offer a dedicated social bond fund, but we believe the market is now large and diverse enough to make social bonds a viable complement to investors’ existing fixed income exposure,’ said Bos.
He added, “‘The market’s growth potential will make social bonds increasingly attractive to a wider range of investors over time. The opportunities offered by social bonds should earn them a place in any well-diversified portfolio.”
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