Bonds That Do Good—and, Maybe, Well

Bonds are now lending philanthropy a hand.Nonprofits and corporations are creating bonds and bondlike instruments that combat some of society’s biggest challenges and that yield returns for investors who want to assist such social causes as health care, housing and education.

The bonds fall into two categories: impact bonds, whose returns aren’t fixed but instead tend to be determined by the outcome of each project in question; and social bonds, which, like another recent invention, green bonds, are structured like regular bonds, with a fixed rate of return. The market for social bonds is still tiny, and for impact bonds tinier still. But amid growing interest, assets have risen more than fivefold in just three years. Annual global purchases of social bonds rose to $13.4 billion last year from $2.4 billion in 2016, according to data compiled for The Wall Street Journal by Dealogic, a market intelligence firm. This year, there have been purchases of some $8.4 billion of social bonds, through August. Since 2010, investment in impact bonds has totaled around $408 million as of September, the Brookings Institution says. There is not a single prevailing model for impact bonds, but in general they are created by nonprofits and backed by money from donors including foundations and governments. In effect, impact bond-buyers are supplying capital upfront to the project, offering flexibility by providing funding over a longer period than grants. The payouts almost always come from governments that also wish to support the project. Green, social and impact bonds are far more common overseas than in the U.S. or Asia. France, Italy and the Netherlands are the countries of origination for 90% of social bonds this year, followed by the U.S. with 6% and South Korea with the remaining 4%, Dealogic data show. Last year saw the issue of about $147.9 billion of green bonds and $17.2 billion of sustainability bonds, which finance social and environmental projects, meaning social bonds represented just 8% of the combined market, according to Dealogic. What kicked off the social bond market, says

Agustin Martin,

head of credit research at the Spanish bank


was the International Capital Market Association’s publication of Social Bond Principles in 2017, creating a framework for the market similar to the market for green bonds. “Issuers of social bonds now had a benchmark set of principles to align with,” Mr. Martin says. The principles urge that social bonds address vulnerable populations, such as people living below the poverty line, the disabled or the unemployed. Desirable types of projects, according to the principles, include those that increase access to food, employment, education and housing. In January,

Bank of America

became the first U.S. bank to issue a social bond. The four-year, $500 million bond was issued to help refinance the bank’s affordable-housing and community-development program and sports a coupon with 3.3% return at maturation in 2023. “I anticipate the green bond and social bond markets are here to stay,” says

Suzanne Buchta,

global head of ESG capital markets at Bank of America. “This is just the beginning.”

Growing Impact

The value and number of bonds issued globally for social and environmental projects have grown steadily in recent years.

One of the most successful social-bond efforts to date has been a partnership of the International Finance Facility for Immunisation, or IFFIm, and Gavi, formerly known as the Global Alliance for Vaccines and Immunization. In 2006, IFFIm issued its first vaccine bond, a $1 billion issue which after five years provided a 5% yield for investors. While various governments and the Bill and Melinda Gates Foundation support Gavi’s work through installment payments, the social bonds help the agency raise money more quickly. “It provided a dramatic boost to Gavi’s program of vaccinating children in developing countries,” says

Cyrus Ardalan,

chairman of IFFIm’s board of directors. To date, IFFIm and Gavi officials say their partnership has raised $2.62 billion, immunized 129 million children and saved 2.2 million lives. “When we speak to investors, I think they find it very, very attractive because there is no sort of questions about how the funds are going to be used,” Mr. Ardalan says. “Vaccine bonds are completely pure, unambiguous, socially responsible financing.” In July, IFFIm issued its 35th offering—a six-year, 600 million Norwegian kroner ($66.7 million) bond that yields 6.1% at maturation in 2025. The bond raises funds to develop vaccines for diseases.

Alongside social bonds, impact bonds are also slowly gaining ground. In 2017, the largely government-funded International Committee of the Red Cross issued its first impact bond to build and equip three physical-rehab centers in Mali, Nigeria and the Democratic Republic of Congo. If the ICRC centers serve patients more efficiently compared with other locations, purchasers of the $20.14 million, five-year bond stand to earn as much as 7%. If the centers serve patients at a poorer rate than other locations, investors could lose as much as 40%. Purchasers of the bond issue included insurer Munich Re. “At this stage, there is no reason to anticipate any losses [for investors],” says

Juan Luis Coderque Galligo,

head of new financing models at the ICRC. Still, impact bonds are riskier than conventional bonds because they carry risk similar to that of stocks and don’t have a fixed rate of return, says

Francesca Suarez,

ESG analyst at Mirova, the sustainable investment arm of French bank


On the other hand, she says, social bonds aren’t any less risky than a general corporate bond. “The main difference of the social bond [and a general corporate bond] is the commitment to transparency and link to social projects,” she says. “By investing in social bonds, investors can be a part of the change that the bond represents.” Despite a clear demand for the bonds, Ms. Suarez says, the biggest hurdle is finding projects that can be measured and reported. Social bonds have tended to remain available only to large institutional investors, but there are signs that is changing. Columbia Threadneedle Investments, a Boston- and London-based money manager with $468 billion under management, has launched three social-bond funds in the past five years, in the U.K., U.S. and Europe. Each fund contains a mix of social, sustainability and green bonds. In 2013 the firm launched the UK Social Bond Fund in Britain, which has grown to £171 million (about $213 million) from £67 million in its first year. Total assets across the three funds stood at around $466 million in September. For now, Columbia Threadneedle doesn’t have plans to offer more social bond funds because they are focused on their current funds, says Simon Bond, director of responsible investments at the company. But last year the firm started managing the social-bond strategy for VBV, Austria’s largest pension fund. Another option for consumers to invest in social funds: In 2012, Nuveen, a U.S. money manager currently with close to $1 trillion under management, launched the TIAA-CREF Social Choice Bond Fund. The mutual fund invests in high-ESG-scoring bonds and some social bonds, including one that funded a vocational school in rural Arkansas, says

Stephen Liberatore,

managing director at Nuveen and manager of the TIAA-CREF Social Choice Bond Fund. The fund held around $4.2 billion as of July, up from the $86 million it had a year after its launch. Mr. Liberatore says that if investor demand continues to grow, Nuveen would form a fund that solely invests in social bonds. Mr. Holger is a reporter for Dow Jones Newswires in Barcelona. He can be reached at

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