What ESG investors want: the ‘S’ of ESG

While the COVID-19 pandemic has served as a catalyst for social bond issuances, social bonds are continuing to gain market share in the ESG debt market, fuelled by the increasing public awareness that society’s transition to net-zero must be a ‘just transition’, too. 

Hosted by NatWest’s Nathalie Larrousé and Niceasia Mc Perry from Climate & ESG Capital Markets and Clément Houriez from Credit Sales, this is what the panelists, Doug Farquhar from NN Investment Partners and Théo Kotula from AXA Investment Managers, had to say:   

Evaluating social performance

“Producer” as important as the “product”: for investors, the ESG risk profile of the issuer is as important as the social bond itself. Once the issuer passes an investor’s screening, the social bond will have to pass some early tests – such as alignment with the International Capital Market Association’s (ICMA) Social Bond Principles and meeting a pre-defined threshold of delivering social benefits (set by the investor). 

Positive social impact needs to be delivered internally and externally: looking at the issuer profile, investors consider both, internal social aspects – such as, for example, relations within the supply chain or diversity within the organisation – and external aspects, for example how an issuer engages with communities and other stakeholders. However, when it comes to the social bond, the focus lies on the external social impacts that are going to be delivered.  

Social taxonomy the next right step: the panellists welcomed the final report on the EU Social Taxonomy – closely aligned with the EU Taxonomy for sustainable activities – which will define what constitutes a social investment and will make it easier for investors to engage with issuers on social issues. Equally, that taxonomy can guide issuers how to ensure their social bonds deliver true social impact. However, the social taxonomy will take some more time before it comes into force – meanwhile, investors will have to work with their own methodologies to assess the ‘S’ of ESG.

Investors and issuer collaboration to avoid ‘social-washing’: as a relatively young market, a defined set of criteria and definitions that ALL market participants can use when describing and assessing social performance doesn’t yet exist. Hence, there’s a much greater risk of ‘social washing’, which can only be eliminated when issuers and investors collaboratively develop a common understanding and definitions of social impact.

Social Use of Proceeds Bonds

Be specific and maintain open dialogue to help solve ‘S’ data challenge: often, with a lack of meaningful social data to support the claims of issuers, investors are keen to engage with issuers directly to understand what they are trying to achieve. Therefore, issuers must allow investors sufficient time to review their social bond framework and to ask questions, meaning that the dialogue needs to start much earlier than 24 hours before an issuance (as has been seen in some geographical markets). At the same time, more data isn’t always the answer. Sometimes, frameworks are too long and include unnecessary data and information with the aim of impressing. However, what investors want is specific information that help to more easily measure the benefit of the social projects funded through the social bond.

Social Use of Proceeds bond (UoP) are not for everyone, but Sustainability-Linked Bonds (SLB) could be the answer: issuers from the health sector, the energy and utility sector and telecommunications are better placed to issue social bonds because of their inherent social purpose (such as providing access to energy or digital inclusion). Meanwhile, SLBs can equally address social issues and drive meaningful social improvements and therefore should be used as a financing tool for those companies that can’t gather sufficient eligible social assets but aim to improve their social performance.

Annual impact report is a ‘must’: investors expect the impact reporting to be annual until the maturity of the bond, and issuers need to make sure that they are clear about which asset pool they are reporting the impact against. Also, getting independent verification of impact data gives investors additional confidence.

Social KPIs and social targets

Historical data helps to better understand the impact an issuer makes: to overcome the challenges of social data and targets being bespoke to companies and therefore potentially difficult to compare, issuers should provide historical data and in particular reference data points when defining and reporting on their Key Performance Indicators (KPIs).

ICMA registry of KPIs useful source for issuers: the updated ICMA registry of approximately 300 KPIs for SLBs is a useful tool to assess materiality and relevance when selecting KPIs.  KPIs related to diversity, health and safety, and working conditions are considered ‘good’ internal social KPIs while ‘good’ external KPIs include for example access to housing, access to digital services and access to medical services.

Watch the full webinar

To hear more about ESG investors views and predictions about the ‘S’ in ESG, watch the replay of our webinar.

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