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Appetite for social bonds grows as investors turn to ‘S’ in ESG

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Goldman Sachs Asset Management has published the findings of its social bonds survey, Investing in Inclusive Growth.

The survey incorporates the views of more than 700 investment professionals across 11 key European markets. The respondents include chief executive officers, heads of ESG investing and portfolio managers from investors such as insurers, pension funds, banks, charitable foundations and family offices.

Nearly two thirds of investors (65 per cent) surveyed currently allocate to social bonds or are interested in doing so. Potential social impact and a commitment to sustainability are the biggest motivators for investing in social bonds.

The survey found that less than 12 per cent of respondents had no preferred social theme for social bond investing, indicating that investors come to the asset class with a clear impact agenda.

A perceived shortage of products offering exposure to the market topped the list of investors’ concerns about market access.

Once seen as a niche area of fixed income, social bonds are entering the investing mainstream, Goldman Sachs writes, driven in part by the COVID-19 outbreak when governments around the world ramped up issuance to finance programs designed to protect public health and mitigate damage to their economies. A total of 50 social bonds were issued in 2019 (pre-pandemic); a year later that number had more than quadrupled to 227.

Building on the foundation laid by green bonds, social bonds had grown into a EUR464 billion market by the end of 2022. This rapid expansion has been made possible by the strength of investor demand for social bonds, especially in Europe, the firm says. Nearly two thirds of investors (65 per cent) surveyed currently allocate to social bonds or are interested in doing do. In terms of currencies, euro-denominated securities are by far the largest part of the market, reflecting active issuance by the European Union and key member states.

The survey finds potential social impact and a commitment to sustainability are the biggest motivators for investing in social bonds. Asked which target population they would seek to benefit through social bond investing, nearly 57 per cent of respondents chose people underserved owing to a lack of quality access to essential goods and services.

Among the social themes that can be advanced through social bond investing, the most popular 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 per cent of respondents had no preferred social theme, indicating investors in the asset class have a clear impact agenda.

A perceived shortage of products offering exposure to the social bond market tops the list of impediments the respondents see to investing in the market, followed by concerns about the level of market diversification. As the social bond market continues to develop, the firm expects such obstacles to diminish.

“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,” notes Bram Bos, Global Head of Green, Social and Impact Bonds at Goldman Sachs Asset Management. “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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