By Zahara Malik
Social impact bond blends public-private partnerships, results-based financing and impact investing
The World Health Organization (WHO) declared Covid-19 a pandemic on March 11th, 2020 causing significant economic and social implications, which continues to evolve rapidly across the world.
The persistent effort for finding long-term solutions to overcome its effect is both ongoing and at the forefront of governments, corporates, philanthropic foundations and the global community itself. There is a need more so than ever to look for innovative ways to combat the situation and relieve its effects. One such solution gaining traction in the market is the use of social impact bonds (SIB). As Sir Ronald Cohen stated “A SIB is an excellent tool for preventing different harmful matters and global issues”.
The social impact bond blends public-private partnerships (PPPs), results-based financing and impact investing. Within a social impact bond, private investors provide up-front capital for social needs and are repaid by a measurable outcome funder dependent on the achievement of agreed-upon results which is similar model to a “green bond”. The COVID-19 crisis has presented significant challenges for the global economy, and society which has paved the way for the adoption and exploration of social impact bonds.
A memorandum published by Cleary Gottlieb highlights two significant issuances since the pandemic was announced:
1) On 20 March 2020, International Finance Corporation (IFC) issued $1 billion of notes with a three-year maturity designated as social bonds to support the private sector and employment in developing countries affected by the COVID-19 outbreak.
2) Additionally on 27 March 2020, the African Development Bank (AfDB) raised $3 billion of notes with a three year maturity under its social bond framework. This particular SIB issued by AfDB is intended to improve the social and economic impact of COVID-19 on Africa, which equally aligns directly with their regional development aims to fund essential services such as healthcare, water and sanitation to supporting employment.
As highlighted by WHO, achieving the UN Sustainable Development Goals (SDGs) in health alone would require new investments increasing over time from US$ 134 billion annually to $371 billion by 2030. The current crisis is still developing; therefore, it is likely that sovereigns, corporate issuers and global entities will explore SIBs over the coming months to ensure continued innovation in investing in our growing and pressing social issues.
Moody’s Investor Services, stated that green, social and sustainability Bonds accounted for 4.5% of total global bond issuance in 2019, up from 3% in 2018. Social-focused bond issuances are forecast to total $25 billion in 2020. The global social impact bond market has continued to grow rapidly, this is due to the fact that issuers (which include governments and corporates) attribute a significant importance to Environmental, Social and Governance (ESG) needs.
Most importantly, why are social impact bonds a solution? Issuing a bond with a defined social purpose determines that the issuer highlights a particular social problem as a priority, which conveys a powerful message. The bond determines a specific amount of funding for a purpose and allows the issuer to present as a separate, non-fungible item on the balance sheet or budget. Therefore, the message is evident, that a definite amount of measurable funding is committed to the clear purpose, that this funding stream will not be cut in future, and that the funds will only be used for the defined purpose and not applied elsewhere.
Furthermore, SIBs allow the issuer to attract to a broader array of investors, who are particularly focused on ESG and Impact Investing. We have seen a significant growth of such investors who provide a substantial source of capital throughout the world. In 2018, signatories to the UN-sponsored “Principles for Responsible Business” had $80 trillion in assets under management, to add a recent survey commissioned by Morgan Stanley, states that 84% of millennials investors are focused on ESG. Having access to a broader range of purpose driven investors there can be an advantage in terms of liquidity and pricing.
In November 2019, Abu Dhabi revealed GCC’s first social impact bond under the Authority for Social Contribution, Ma’an. The announcement of the first social impact bond sparked both global intrigue and regional respect of creating an internationally recognised method of financing and delivering solutions for social challenges. With COVID-19 creating a global curveball, Ma’an has already a played significant role in convening groups across the UAE to combat key social needs throughout COVID-19 and the issue of their SIB in 2020 is extremely timely. If the SIB is proven to be effective, it could be potential solution to successfully address some of the regions specific social issues and have the opportunity to increase competences in public spending.
The extent of the Covid-19 crisis is yet to be defined, however innovative solutions will be of utmost significance to global recovery. Whilst the social impact bond market is in its infancy, coupled with growing concern over previous SIB models including the 2017 World Bank’s Pandemic Emergency Financing, SIB development is accelerating global strategies overcoming the world’s most pressing issues.
Furthermore, investors prior to the pandemic, were increasingly placing Impact Investing at the forefront of their investment evaluation. This, in combination with global demand arising from recent events, could drive the market for SIBs to expand considerably and could be seen as one of the key long-term solutions to overcome Covid-19.