While social bond issuance has risen globally in recent years, the Nordics have bucked this trend, despite their usual position at the forefront of sustainable finance. Now, with its new Social Bond Framework, MuniFin looks set to change this.
Municipality Finance (MuniFin), the official credit institution responsible for Finnish municipalities’ funding, on 13 February published its inaugural Social Bond Framework. MuniFin is no stranger to the sustainable finance market, having issued around EUR 1.5 billion equivalent in green funding since 2016.
The social framework marks the next chapter, not just for MuniFin but for the broader Nordic market. The region is well known for its advanced and thriving green bond market, largely led by Sweden. But social and sustainability bonds have remained relatively uncharted territory until now.
Breaking social’s stigma and taking it mainstream
Social bonds are use-of-proceeds bonds that raise funds for projects with positive social outcomes. One explanation for why “social” hasn’t caught on in the Nordics may, oddly enough, be found in the region’s welfare model, as the label has to a large extent carried a stigma.
Just like the question that would often come up in the green bond market: “If one of my bonds is green, does it mean that the rest of them are brown?”, the same line of thinking has made social bonds seem “taboo”. It implies that the bonds not labelled “social” are the “brown” equivalent of social.
MuniFin has sought to break with this view, as is evident in the framework and supporting documentation. They note that “Finnish municipalities have a strong social impact,” while also highlighting that “Finland has been defined as generally good with respect to social issues but challenges lie in ensuring educational equality and maintaining high education and competence level, the expanding welfare gap between social groups and overall securing the Nordic welfare society”.
The mechanics of MuniFin’s social framework
Taking a closer look at the framework, it is worth noting a few aspects that highlight how social and green frameworks differ structurally from each other, and how MuniFin has addressed these areas.
The first is on the context. Granted, many would argue that context has become increasingly important also in the green bond world, as shown by the ever expanding introductory sections of green bond frameworks. However, context is arguably even more important in the social bond world, as the concept of social impact differs from region to region. “Green is global; social is local”, as the saying goes.
MuniFin seems to have recognised this. A separate document called the “Social Bonds Framework’s background paper” details not only the background and purpose but also outlines each of the targeted categories of the framework in greater detail.
Secondly, MuniFin has addressed another topic typically seen in the social/sustainability bond space (although arguably also to some extent with green bonds): “thematic” bonds. These are bonds where the use of proceeds targets one particular theme to highlight its importance. Various issuers such as the African Development Bank and World Bank have used thematic bonds to highlight a range of causes (such as “Lighting Up Africa” and “Ocean Awareness” bonds). In their social bond framework, MuniFin highlights that they may issue both traditional social bonds (that is, with a mixed set of social assets) or thematic bonds.
Finally, and arguably most pertinent for the social bond discussion, MuniFin’s Social Bond Framework makes a clear distinction between the respective “target populations” that the categories seek to benefit. Although this is specifically mentioned in the Social Bond Principles, opinions are still divided over the need to include these definitions for all categories and also about the level of detail required. In the case of MuniFin, the target populations are noted in both the introduction and footnote of the actual framework, and also in the supporting background material.
A broader look at social bonds and their market potential
When it comes to broader developments in the social bond market, MuniFin’s announcement confirms a wider trend of issuers increasingly looking to diversify their sustainable funding alternatives.
As seen in the charts below, both the relative and absolute share of social/sustainability bonds have increased in recent years. On a relative level, social and sustainability bonds last year represented more than 20% of the market for sustainable debt.
On an absolute level, SSA (Sovereign, Supranational and Agency) issuers, like MuniFin, have led the way in the social and sustainability bond space – much like they did in the early days of the green bond market. Using the green bond market as a proxy, we estimate that it should take another 2-3 years before social/sustainability starts to become a more stable part of also the corporate sustainable bond space.
That said, there is an interesting divergence for corporates when it comes to social and sustainability bonds, as the latter have taken off in 2019. One relevant explanation for this is that the sustainability label better allows corporates to tell their overall sustainability story and is also less restrictive on the types of proceeds that can be used.
Looking ahead it is evident from the discussions in the market that there is interest in talking about more than climate. Social bonds offer a great way to do this.
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