Measuring Social Bond Impact

What are the challenges of measuring social impact?

• Green bonds that finance environmental projects can fall back on carbon emissions reductions. It’s much more difficult to calculate the impact of a social bond on, say, poverty reduction or job-creation since there are so many factors at play
• Issuers list expected social impact benefits before a bond has been issued so impact can only ever be the result of modelling, with a lot of uncertainty and moving parts
• Social impact can take a long time to emerge; poverty-reduction doesn’t emerge overnight
• Investors need to take on trust that social projects will factor in all reasonable elements to hit targets and be clear that it may be impossible to truly determine impact
• The best social bond issuers can do is be transparent about the projects they’re financing, which target populations they’re reaching, and how many people are being reached

 What role can investors play?

A critical part of the story is active investor engagement. Driving a positive social or environmental end-game and adding value is better achieved through active engagement with management than through social screening. To avoid cries of social-washing, investors should demand clear pathways i.e.:

• Impact assessments that define exactly what issuers want to achieve
• The metrics issuers have aligned against their bonds
• A formal commitment to create detailed impact reporting throughout the life of the bond.