The Growing Role of Social Sustainability in the Swedish Capital Markets

On March 23, Nasdaq and PwC Sweden hosted an event on the role of social sustainability in financial markets at Nasdaq Stockholm. The event featured speakers from the Council of Europe Development Bank, Elekta, Länsförsäkringar, Swedbank, Nasdaq and PwC. The seminar centered on challenges to overcome lack of definitions, standards and clear objective measures involving social sustainability. Each panelist spoke about how social bonds excel within their respective industries while imploring the need for more transparency as the social bond market grows.

Panelists were asked:

• What is needed for corporate issuers to leverage the social bond markets in the future?
• How are investors and issuers measuring social impact today? 
• Will social loans be a more natural fit? 
• Will sustainability-linked bonds become the vehicle that allows corporate issuers to integrate social sustainability into their financing going forward?

Background

In 2022, a total of SEK 5.53bn in social bonds were issued in the Swedish market. As of today, there is SEK 20.55bn outstanding bonds, making up 3% of all outstanding SEK ESG-themed bonds. Even though social bonds have failed to follow the growth pattern of their environmentally themed cousin (the Green Bond), interest is rising among both corporations and public entities. There is a clear demand for investments that contribute to a wider set of sustainability targets and goals.

In a European context, social bonds have primarily been adopted by large supranational organizations and government agencies with clear mandates to finance a prosperous social development of the region. In the corporate sector, the social bond label has mainly been adopted by financial institutions, addressing small and medium-sized enterprise (SME) financing and social housing.

Many non-financial corporates struggle to find investments large enough to qualify for social capital markets financing. Instead, an increasing number of Nordic companies have turned to the relatively new market for sustainability-linked financing, where the issuer is penalized for not meeting predefined targets or rewarded if targets are met, rather than using the capital for specific projects or assets.

 1. An overview of the market for social loans and bonds.

Sophie Nachemson-Ekwall (PwC) presented a market overview of the global social finance market, before zooming in on the Nordics and Sweden. She described the ambitions set out to assure quality and social impact in social frameworks that are structured in accordance with the ICMA (the International Capital Markets Association) principles. While Europe is taking a global lead on social bonds, pick-up in the Nordics has been slow.  

PwC has collected a list of nearly 20 Nordic social bonds and sustainability bonds with both green and social goals. Among these, we find seven targeting social housing and sustainable housing, three linked to gender and two to financial inclusion. Three Swedish issuers are making themselves ready for issuance - Swedbank, Malmö Stad and Kommuninvest. The Swedish Export Credit Corporation, SEK, has a sustainability framework but has yet to issue a social bond.

During the last years, Sustainability-linked bonds have quickly outgrown the market for social “Use of Proceeds” financing. For certain sectors, it may prove a more efficient way of integrating social sustainability into financing programs than the conventional social bond.

Sophie concluded by raising some issues that have been slowing the adoption of social bonds in the Nordic markets. Firstly, investors and corporations in the Nordic welfare countries need to be bolder and dare to commit private capital to social impact and support the work with developing standards. Also, too many are afraid of social washing. The risk should be taken seriously, but the solution lies in supporting the work to enhance quality in reporting on metrics and processes for the social activities combined with validation from experts or an audit rather than abstaining from investing. In addition, investors in all labeled bonds must keep an eye on conflicts between the sustainability goals. The green transformation needs to be inclusive. As a last note, Sophie highlighted that social achievements can seldom be delivered alone, rather partnerships and collaborations will be key for success.

2. Transparency is key in sustainable finance; how can social debt issuers harmonize and standardize their impact data?

Axel Holm, Head of European Corporate Bond Listings at Nasdaq, illustrated the differences in reporting between the green and social bond markets, where it is evident that the green bond market is well ahead when it comes to comparability, objectivity and standardization.

However, there is still a number of green bond issuers that have not been able to quantify the impact of their financed projects, suggesting that the investment community can be understanding of the fact that certain projects do not easily lend themselves to impact-measurement. 

When analyzing data from the Nasdaq Sustainable Bond Network, it is evident that social bond issuers need to find a balance in granularity that allows investors to aggregate the data to a portfolio level in a relevant way. As the green bond market has matured, so have the tools accessible to investors looking to analyze the total impact of their investments. In order to analyze large portfolios of any sustainable bonds, it is important that issuer’s reports are developed to account for data-usability.

The impact metric that has gained the broadest traction in the global social bond market is classified as the number of people benefitted. In terms of usability, the metric is not as straightforward or objectively comparable as traditional environmental metrics, such as CO2 equivalents reduced. Therefore, it is important that investors contextualize impact figures by mapping them to the relevant project categories and target populations.

In order to drive the development forward and increase the level of usability of data for investors, Nasdaq supports the work taking place in the context of the ICMA’s working group on publishing harmonized guidelines for impact reporting. 

3. Social loans, the natural step for growing the market further?

Katya Nolvall (Swedbank) presented how banks not only give social loans directly but also consult issuers on how to tie socially impactful projects to their financing.

Swedbank has developed a sustainable funding framework that describes the characteristics and eligibility requirements of both the green and social loans they offer. Social loans have thus far mainly been issued in the Baltic states in the categories of Employment Generation and Socioeconomic Advancement & Empowerment. By the end of 2022, Swedbank reported a total volume of SEK 6.3 bn in social loans.

Katya further highlighted the importance of defining a “target population” when issuing social debt instruments to clarify who should benefit from the investments undertaken. Whilst the target population is important and provides a much-needed context for social projects, it can also add hurdles to prospective issuers. In contrast to the green bond market, it is not sufficient to define the type of project or asset you will be financing which may be one of the underlying reasons for the relatively slow pickup of the social label in the Nordic markets.

Katya went on to exemplify how issuers have been able to use official public definitions in the social bond market in Sweden to help overcome the perceived difficulties in defining a target population. One example is Malmö-based Trianon Fastigheter that successfully integrated the Swedish Police Authority’s definition of “vulnerable areas” as part of their target populations for social financing.

Katya highlighted that for Swedbank’s Swedish customers there is a gap in perception related to the social challenges that need to be dealt with and the private corporations´ involvement in social matters. Katya highlighted that it requires a different mindset to realize that private corporations need to commit themselves to what was previously perceived to be the responsibility of the state.

4. How governments can finance social development

Felix Grote from the Council of Europe Development Bank (CEB) presented the bank’s social inclusion bond (SIB) program and what qualifies as social projects under their framework.

The CEB finances social projects in their member states and its SIB's address affordable housing, access to essential services (such as education and health) and SME financing and microfinance. The CEB has approved financing for social projects in Sweden totaling EUR 782m over the last 10 years. The projects have mainly focused on the renovation, improvement and construction of schools, as well as nursing homes and healthcare facilities located in areas populated by migrants as well as construction of schools, nursing homes and judicial/healthcare facilities. Loans have primarily been given to Swedish cities but also directly to private companies.

Felix Grote highlighted that one of the key strengths of their social inclusion bond framework is its adaptability to the needs of its member states. In recent times, the CEB have been able to leverage their social bond framework to respond to the COVID-19 pandemic and the suffering of refugees fleeing Ukraine.

The CEB measures impact on an ex-post basis, meaning that none of the reported impact metrics are estimated. When asked by an audience member about the distinction between output and impact, Felix also highlighted that output and outcome are robust metrics as the social benefits of e.g. building a school is evident in and of itself and that the long-term effects would make it necessary to rely on estimates. Furthermore, Felix described that the discourse around output and outcome vs impact has never been as prevalent in the green bond market as it is in the context of social financing.

5. Are Sustainability-linked bonds a more efficient vehicle to incorporate social sustainability targets?

Cecilia Ketels from Elekta, a radiotherapy treatment and solutions company, presented Elekta’s sustainability-linked bond framework and how they have tied the expansion of access to radiotherapy to their financing. The first decision Elekta made when contemplating the different options to integrating sustainability into their financing operations was whether they should use the Sustainability-Linked or Use-of-Proceeds format.

At the time, two of their sector peers had issued in the respective formats. After careful consideration, Elekta decided to opt for linked financing as it meant less administration around reporting and easier integration with their strategic goals. Elekta also highlighted the need to set targets that go beyond business-as-usual, which was one of the reasons they chose to go with linked financing rather than use-of-proceeds financing.

Elekta’s framework is built on one key performance indicator (KPI), the number of linacs in underserved markets. The KPI supports the UN Sustainable Development Goal number three, Good Health and Well-being, and is targeted to grow 47% by 2025, which means that 400,000 additional patients will gain access to life-saving treatment per year. Failing to meet the target will result in a coupon step-up of 35 bps for their fixed tranche and 100 bps for their floating tranche.

Elekta’s sustainability-linked bond framework was given a positive second opinion by DNV. Cecilia described how the process had focused on the materiality and ambitiousness of the set targets and how that process really prepared the team for subsequent investor presentations.

After a few months of preparation, Elekta was very pleased with the outcome of their transaction. Their books were 2x oversubscribed and they estimate that their credit spread tightened during the transaction. Therefore, Elekta plans to continue issuing in the SLB-format going forward.

6. How do institutional investors integrate sustainability into their analysis?

Kristofer Dreiman (Länsföräkringar, Liv) described how Länsförsäkringar selects, evaluates and follows up on the sustainability of their investments.

Länsförsäkringar’s investment portfolio of green, social and thematic labelled bonds totaled approximately SEK 25bn at the end of 2022, which corresponds to approximately 21.4% of the total assets under management (AUM).

Kristofer explained that Länsförsäkringar have decided to target 5 UN sustainable development goals:

• Ensure healthy lives and promote well-being for all at all ages.
• Ensure access to affordable, reliable, sustainable and modern energy for all.
• Make cities and human settlements inclusive, safe, resilient and sustainable.
• Take urgent action to combat climate change and its impacts.
• Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification and halt and reverse land degradation and halt biodiversity loss.

This means that all investments they make in sustainable bonds need to address at least one of these goals to qualify for Länsförsäkringar’s portfolio.

Out of the 22 sustainable bond issuers in Länsförsäkringar’s portfolio, only three have issued pure social bonds, while two additional issuers have issued bonds that mix environmental and social themes. Their mandate restricts them from investing in assets other than SSAs and covered bonds, which means that all the social bond investments have come from supranational issuers like the African Development Bank and the European Investment Bank.

In total, Länsförsäkringar’s sustainable bond portfolio results in greenhouse gas emission savings of approximately 2.3 million tCO2e per year.

The social investments indirectly financed by Länsförsäkringar have mainly targeted projects in the categories of Affordable Basic Infrastructure (e.g., health issues related to Covid-19) and Access to Essential Services (e.g. SME financing).

Analysis and Conclusion

The seminar concluded with a panel discussion with all previous speakers. Many of the panelists argued that the market will continue to develop but that it takes time for the volumes to grow.

The audience was also optimistic about the future growth of issuance volumes. In a poll during the seminar, 49% of the audience responded that the market would grow by 50% and 36% expected a growth of 100% in the next two years. Furthermore, 70% of respondents said that social sustainability was strategically important for their organizations.

One panelist suggested that more issuers should contemplate issuing sustainable bonds that finances both environmental and social themes in order to remove the barrier resulting from low capital expenditures with a social theme.

Moreover, several panelists agreed that issuers might be a bit too worried about the risks associated with being blamed for social washing and contrasted the quality of impact reporting with environmentally themed bonds that do not receive as much criticism for the lack of distinction between outcome and impact.

Lastly, when asked about the use of sustainability-linked bonds instead of social bonds the panel had mixed responses. Länsförsäkringar stated that they are still on the fence concerning the relatively new label as they don’t know how to respond to the fact that they could be rewarded for investing in issuers that don’t meet sustainability goals. Also, the sustainability linked instrument does not suit everyone, as it targets ambitions to transform socially, which is not applicable to supranational institutions that have a purpose to contribute to a positive social development.

To learn more, access the event replay available here.

Other Topics

Sustainability ESG Bonds

Sophie Nachemson-Ekwall

Sophie Nachemson-Ekwall is a Subject Matter Expert at PwC on Social sustainability, reporting & financing

Read Sophie's Bio