The growth of the social bond market has offered a unique opportunity for nonprofit issuers, like Community Development Financial Institutions (CDFIs), to connect with retail and institutional investors and expand the flow of capital to justice-focused work. In ImpactAlpha this week, LISC’s Annie Donovan and Anna Smukowski take a closer look at this lasting shift in how investors view the “S” in ESG and what it means for CDFI efforts to invest in equity and inclusion throughout the U.S.
The excerpt below was originally published on ImpactAlpha:
Social bonds direct proceeds to racial equity as the “S” gains prominence in ESG
When it comes to environmental, social, and governance (ESG) practices, the “S” has long been viewed as the more complicated piece of the conversation for most investors.
But that perspective has begun to change in recent years. The disproportionate impact of the pandemic and our U.S. racial reckoning have laid bare the structural inequalities that limit access to opportunity. That recognition has catapulted social finance to the forefront of the sustainable debt market, growing from $20 billion in 2019 to a record $199 billion in 2021, and it has spurred issuers to offer products that explicitly support racial and gender equity alongside other socioeconomic goals.
Though there is skepticism about whether some corporate commitments to racial equity investments will be fully realized, we think the heightened interest in “S” will continue.
In part, this is because the underlying idea of what constitutes “social” in ESG seems to have shifted. Traditionally, it has referred to how a company deals with social trends, labor, and politics in order to increase profits and boost corporate responsibility. Now, more investors are actively pursuing opportunities to support justice, equity and inclusion, directing capital to projects and initiatives that respond to community needs.
Social bonds
Mission-driven lenders and intermediaries are both contributing to and reflecting this expanded investor appetite. In the U.S., community development financial institutions (CDFIs) and other nonprofit lenders are seeking to democratize social investing with fixed income products that are non-extractive for communities and offer low initial entry points, so more investors can participate.
Social bonds are not new, of course, spanning a diversity of issuers and investors. But the explicit use of proceeds to support racial equity is a more recent evolution. In fact, we have seen a number of corporations and foundations issue social bonds and use the proceeds to lend to CDFIs, which in turn invest to dismantle racial disparities.
That activity may dissipate as more organizations return to pre-pandemic strategies and interest rates rise. But we think expanded CDFI issuance is a sustainable trend. The growth of the social bond market has offered a unique opportunity for nonprofit issuers to communicate with retail and institutional investors that are unfamiliar with the sector. Through alignment with widely accepted yardsticks, like the International Capital Market Association’s Green, Social and Sustainability Bond Principles and UN Sustainable Development Goals, they have been able to better articulate how and why they raise debt to fund high-impact plans.
For example, our organization, the Local Initiatives Support Corporation (LISC), is a CDFI that has issued debt alongside other financing tools to support our work, including our Project 10X initiative, which is focused on addressing racial gaps in health, wealth and opportunity throughout the country. In addition to obtaining public credit ratings, we have increasingly aligned our efforts with Social Bond Principles (SBPs) and connected our goals to the SDGs, all of which makes it easier for investors to understand the field of community development finance, where CDFIs have been active for decades.
LISC has certainly not been alone in bringing new products, strategies and investors to racial equity efforts. Last summer, US Bank and Enterprise Community Partners issued the market’s first racial equity bond to provide targeted investments to underserved communities of color. And last month, the Public Finance Initiative (PFI) and the National League of Cities (NLC) launched a new effort to help issuers center racial equity and measure how social determinants of equity change over time. The collaboration is focused on the municipal bond market, but it should add value for other issuers, investors and stakeholders as well.
Continue to original story [+]...
ABOUT THE AUTHORS
Annie Donovan, COO
Annie Donovan joined LISC In May 2019 as COO. Immediately prior, she was a Senior Fellow at the Beeck Center for Social Impact and Innovation at Georgetown University and a Senior Fellow at the Center for Community Investment at the Lincoln Institute of Land Policy. Annie’s distinguished career in community development and impact investing includes serving as Director of the U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund).
@ADonovanLISC
Anna Smukowski, Senior Director of Capital Programs, Enterprise Community Loan Fund
Anna Smukowski serves as ECLF’s senior director of capital programs, assisting ECLF’s capital and lending teams with capital raising and fund structuring. Prior to this position, she led LISC’s $200 million retail note offering, coordinated LISC investor relations and positioned LISC’s capital raising within ESG, impact and social bond frameworks. Anna also managed $50 million in LISC’s Paycheck Protection Program deployment and has structured and managed affordable-housing and economic-development funds as well as pay-for-success work through a Social Innovation Fund grant award. Anna is passionate about values-aligned investing from the individual to the institutional level and has worked on updating and implementing missionaligned investment policy statements at LISC and ECLF. Anna started her career as a strategy and operations consultant at Deloitte. Anna holds a bachelor of science degree from New York University Stern School of Business and an MBA from Columbia Business School.