Difference between Social Bonds and Social Impact Bonds

In the course of my professional engagements on social bonds, and academic deliverables on social impact bonds, recently I have been confronted a lot with questions pertaining to the difference between the two instruments. This has motivated me to look into the instruments in detail and ascertain the variations on my own.

A social impact bond refers to an innovative financing mechanism in which governments or commissioners enter into agreements with social service providers, such as social enterprises or NGOs, and investors pay for the delivery of pre-defined social outcomes (Social Finance, 2011). The first Social Impact Bond was launched by UK-based Social Finance Ltd. in September 2010.

Social Bonds, on the other hand, are relatively new financial instruments primarily modeled around International Financial Corporation’s existing themed bond products -Banking on Women (BOW) Bond Program (2013) and the Inclusive Business Bond Program (BOW). Social Bonds are bond instruments whose proceeds are exclusively applied to finance a project that delivers social outcomes. This can include projects ensuring access to essential services, affordable housing and micro-finance. The structure of the instruments are similar to Green Bonds. It is the market perception that probably it was the success of Green Bonds that led to the recognition of bonds as viable instruments to address non-financial objectives. It worked for the green objectives, so the next step was social projects.

From a governance perspective, the major difference between the two instruments is that while social bonds are being backed by an international finance institution like IFC and despite being a new instrument, regulated to some extent by ICMA’s Social Bond Principles, there is no existing transnational governance on Social Impact Bonds. This is mostly explained on the basis of the difference in the nature of instruments.

While Social Bonds are intrinsically investor-centered, Social Impact Bonds centre around the local public institutions who are more likely to be the issuers of the instrument. In practice, the term ‘bond’ is construed to be a misnomer for instruments like Social Impact Bonds for they are essentially ‘payment by results’ contracts with “outcome funders” like governments and agencies who pay back the private investors funding the project. The repayment of the principal and the interest is solely dependent on the performance and  success of the project and investors  risk losing everything in case of failure. Social Bonds, on the contrary, are functionally a debt instrument like any other bond with fixed returns and a promise to use the proceeds for the mentioned objectives. The risk is comparatively very low, explaining the investors’ interest in this model of financing social projects.

One would expect that since both instruments target at achieving social outcomes, there would be a similarity in the impact measurement processes and the outcome metrics that are defined to measure social performance. From a practitioner’s perspective, this is not true and the difference emanates from the very nature of the instruments. The success of Social Impact Bonds depends upon effective impact measurement. The outcome metrics are linked to the payment structures and are determined specific to the target cohort, the nature of intervention, and the local context. The structure leaves little flexibility to accommodate investor preferences. Social Bonds, on the other hand, are more flexible instruments and metrics are usually defined on the basis of the investor’s ability to measure with the existing systems.The instrument allows for this flexibility and the rationale is that imposing restrictive metrics will deter investors interest and affect the scalability of the market.

Overall, from a market perspective, Social Bonds are seen more favorable to Social Impact Bonds as emerging innovative financing instruments to address development challenges and that is reflected in the growth rate of the instruments. This stems from the enhanced investor flexibility and lack of need to engage with other stakeholders. Social Impact Bonds are increasingly being perceived as a small market for specific focused projects.



Maturity of ESG Practices in India

India is increasingly aligning itself with the global trend of socially responsible investments and has even made it to Candriam’s latest list of investable ESG-friendly countries. According to the data provided by Morningstar, the asset size of funds dedicated to an ESG strategy was $28.54 billion in emerging markets with an annualized growth rate of 27.6% over the three years, from July 2014. According to the Morningstar India Sustainability Index, Indian companies are faring better than those in other emerging markets in this regard.

Traditionally, Indian firms are not known to be ESG compliant. In fact, in the recent years, few global companies have divested out of certain companies in the country for failure to comply with the international ESG standard benchmark. Investors from developed markets are now more conscious of parking their funds in companies that not only create value for shareholders but also have good ESG policies. This has been a significant push for Asian companies to move towards improved stewardship from on ESG issues.

The ESG investment landscape in India is still at the nascent stage and it is green financing that is the forerunner. This is due to a reorientation of public policies in favor of greener growth, consistent with the commitments undertaken by the country at the COP21 to transition to a low-carbon economy. Most stakeholders have become environmentally conscious and are consistently looking to integrate environmental aspects of their businesses in their mainstream investment strategies. Renewable energy has been deemed a priority lending sector for banks, and the Securities and Exchange Board of India (SEBI) has issued voluntary green bond guidelines.

Yes Bank as the first and only Indian Bank to be ranked in the Dow Jones Sustainability Indices (DJSI) for the third consecutive year in 2017 stands out for its ESG practices. The Bank issued the country’s first ever green bond, one of the first among the emerging economies, in February 2015. It also developed internal indices for selecting projects to give loans to that along with financial performance also measure the environmental, social and governance (ESG) impact of the project. For its sectoral leadership in ESG performance, Yes Bank has been selected as an index component of FTSE4Good Emerging Index, which comprises companies from 20 emerging economies, selected through an assessment on over 300 data points that include distinct environmental, social and governance pillars.

As of 2017, stocks of Indian companies committed to mitigating risks arising from climate change have fared well belying the belief that socially responsible investments find it difficult to generate long-term performance. This is reflected in the performance of the BSE Carbonex index which is a thematic index measuring a company’s ability to address climate change risk and opportunity. In line with sustainability investments, another of the BSE Indices that is extremely relevant here is the BSR Greenex index that consists of the top 25 stocks that adopt relatively better energy-efficient practices.

On the social and governance front, NGOs like Oxfam India, Corporate Responsibility Watch, Praxis and Partners in Change have collaborated to come up with the India Responsible Business Index (IRBI), now in its second edition after 2015. This index ranks the top 100 BSE-listed companies on their performance on five parameters – inclusive supply chain, community as stakeholders, community development, employee dignity, and human rights & non-discrimination at the workplace. The information is accessible by all stakeholders and can be used by the companies themselves to self-assess and take corrective actions. The only limitation is that none of the information provided is externally validated as the Index is based on self-reported and publicly available disclosures (Sustainability & Business Responsibility Reports). Every company’s policy commitments are measured against the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business. The IRBI exercise, nevertheless, is an example of a successful ESG engagement process which has the potential to influence the behavior of companies in different sectors in the long-term.

There is still a long way to go. Only four Indian business houses have made it to the DJSI World Index this year. ESG has become a concern among Indian companies, but it still has to become a priority. As the research from Cambridge Associates goes, if successfully integrated, ESG strategies have the potential to make a stronger contribution to the  overall performance of companies in emerging markets than to those in developed markets.


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  2. http://indiacsr.in/yes-bank-maintains-its-position-on-the-dow-jones-sustainability-indices/
  3. http://www.livemint.com/Money/DiR07xxx6iZucroHNjhNDO/BSE-Carbonex-index-outperforms-Sensex-so-far-in-2017.html
  4. http://www.livemint.com/Companies/3bTodoRzkIluq20saQoInO/Companies-turning-more-responsible-but-still-a-long-way-to.html
  5. https://www.top1000funds.com/analysis/2017/02/08/dont-let-distractions-thwart-esg-focus/
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