During the Covid-19 pandemic, social bond issuance was the fastest-growing segment of the global sustainable debt market, worth a record $732bn in 2020.
However, as the use of social bonds to fund pandemic relief declined, 2022 saw appetite for this ‘niche area’ of fixed-income wane, with issuance falling 34% year-on-year to $141bn. By the end of 2022, social bond issuance stood at €464bn, according to data from Goldman Sachs Asset Management.
Many European banks have issued social bonds in recent years, including the Royal Bank of Scotland, Nederlandse Waterschapsbank, BBVA, Crédit Agricole, CaixaBank, Bank Gospodarstwa Krajowego and NatWest.
Now, one year after the launch of Swedbank’s Sustainable Funding Framework, the Nordic-Baltic banking group joins its European peers with an inaugural €500m social bond due September 2030, marking a major milestone for the Nordic banking sector.
Keeping the ‘S’ in ESG
Commitment to sustainability and scope for social impact are the biggest motivators for investing in social bonds, according to Goldman Sachs Asset Management’s social bonds survey, Investing in Inclusive Growth.
Social inclusion is part of Swedbank’s DNA, says head of group sustainability Fredrik Nilzén, reflecting on the allocation of the €500m bond proceeds which go towards three of the four social asset categories in the bank’s Sustainable Funding Framework.
Swedbank plans to enable socioeconomic advancement and boost employment through the financing of small and medium-sized enterprises in Estonia, Latvia and Lithuania. The bond proceeds are also allocated to financing of a Swedish company that specialises in providing communications solutions for people with disabilities, as well as a housing project aimed to uplift socio-economically weaker neighbourhoods.
We have seen an increasing number of customers who want to ensure that their investments affect the social agenda, not only the green agenda. More banks should do that.
In addressing rental issues at home, Swedbank’s social bond aims to increase affordable housing through the financing of real estate, using rent levels in line with Sweden’s government-sponsored tenancy programmes.
Mr Nilzén says the ambition is to support property development, both through new builds and renovation schemes, to enable an increased number of tenants to access lower rental costs. Lower-income families and those newly entering the property market will be targeted, he adds.
Although more than 80% of European investors and issuers surveyed by PwC Luxembourg in 2022 expect ‘green bonds’ to be the top green, social and sustainable (GSS) bonds issued in the next 24 months, Mr Nilzén says the social aspect of sustainable change is just as important as greener aspects.
“Swedbank must go back to its customers. That’s where we are; that’s our business. Our promise is to help customers become more sustainable, and we have seen an increasing number of customers who want to ensure that their investments affect the social agenda, not only the green agenda. More banks should do that,” he adds.
Social bonds still need extensive work
The Nordics’ first social bond piqued interest across the European investor community, which has been instrumental in driving social bond growth more widely. Swedbank hopes to issue additional social bonds now the bank has “broken the ice” in the Nordics, Mr Nilzén says, hoping to see more banks support customers regionally and Europe-wide through increased social investment and social bond issuance.
Green bonds are expected to reach €691.2bn of new issuance in Europe by 2026, with social bonds accounting for €317.1bn and sustainability bonds €391.8bn, according to PwC Luxembourg’s survey of European GSS issuers and investors.
Although a growing trend, Mr Nilzén says social bonds will not take off just yet, because extensive work is required to gather information, assess data points and implement quality assurance.
The transition for financial services is like a “transparency revolution”, he adds, given that as social bonds progress, banks must be able to properly justify and assess the impact of social-based lending, using data.
With sustainability reporting regulation developing in the EU and 2024 seeing the implementation of the Corporate Sustainability Reporting Directive, banks will have to source and provide more data about how social and environmental risks are managed. “This data will hopefully help ignite a growing social bond market,” Mr Nilzén says.
Nordic countries are well positioned to continue breaking the ice in this sector; Mr Nilzén points to robust foundations in cross-sector sustainability collaboration, as well as strong levels of digitisation as assets in Nordic social financing development.
As better data offers opportunities for social bond issuance, the landscape of social financing may open up and become more standardised. Reflecting the need to work on both climate and social challenges, Mr Nilzén looks to the financial services sector as a means to accelerate positive change through the shift of capital, predicting that social bonds will increasingly come to the fore.
