[Urban Chronicles 2.0 #04] Social Impact Bonds and Sustainable Bonds: new financial leverage?

Green or Sustainable Finance?

According to the UN, nearly 70% of the world's population will live in urban areas by 2050. As a result, spatial planning issues are closely linked to environmental, but also social and societal criteria that are increasingly present to ensure the coherence of urban development over the long term. In this context of transition, financing needs are considerable and new tools are emerging: Social Impact Bonds and Sustainable Bonds.

Is this the end of Green Finance for Sustainable Finance?

What special features for these new issues?

Social Impact Bonds, or contracts with social impact, are financial bonds issued by a public administration or a private company to private actors to finance social projects. The particularity of these issues is that the interests of investors depend on the success of the projects financed, according to pre-determined objectives.

Social Impact Bonds are most often part of public/private partnerships (PPPs) for financing social policies. They are particularly relevant in a context of public debt reduction, with the State contributing less to the social sector, while new economic opportunities for businesses are being created. The social commitment of companies is also reinforced by the growing importance of CSR policy.

The first Social Impact Bond was issued in 2010 by the UK Department of Justice to fund a programme to reintegrate prisoners who have served short prison sentences.

In France, the first experiments were carried out in 2016 with the Adie association and the management company IMPACT Partenaires, respectively for professional reintegration projects in rural areas and business creation projects in targeted neighbourhoods.

Sustainable Bonds, on the other hand, can be a combination of Green Bonds and Social Impact Bonds or a hybrid issue to finance both social and environmental projects. In this way, they can offer the issuer more flexibility as regards the eligibility of the projects financed and can allow a global approach to sustainability.

With a total of 130 billion euros of Green Bonds issued worldwide in 2017, against only 7 billion euros in Social Impact Bonds according to the 2018 report of the International Capital Market Association, the Social Impact Bonds and Sustainable Bonds have a very important development margin. The horizon is all the more favourable since the private sector has also joined the party. In March, Danone issued a €300 million Social Impact Bond, a first in France.

What applications for the real estate sector?

Nowadays, the real estate sector is not only forced to take into account environmental issues but also societal issues. The latter can become a long-term risk if they are not correctly anticipated, as shown by the CSR materiality matrices of the seven main French property companies[1]. Five of them mention diversity or social cohesion as a material issue and all mention local development or integration into territories.

Two applications of Social Impact Bonds are possible: the issuance of bonds by the private sector for urban projects with social impact and the issuance of bonds by the public sector to finance urban social policies. 200 million to the Société Nationale de l'Immobilier (SNI) to meet emergency accommodation needs linked to migratory flows by transforming budget hotels into accommodation centers.

Today, urban social issues are multiple and globally concerned by the rise of inequalities: territorial development and attractiveness, access to housing, inclusiveness and prevention of inequalities, "marginalization" of housing, management of migratory flows. The growth of inequalities in urban areas raises the risk of a spatial and social divide in society that is difficult to reverse. Thus, in the face of social risk, it is necessary to reflect on an urbanization that integrates these issues. The new financing levers identified will therefore be assets to create value over the long term.

In conclusion, the Social Impact Bonds and Sustainable Bonds are new financial levers relevant to finance urban social and societal transitions. However, assessing the impact and success of funded projects is a complex financial and structural issue that we will address in a future episode!

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