16 Mar SOCIAL BONDS AS A LEVERAGE MECHANISM TO ESG
The term “ESG” stands for Environmental, Social and Governance. It is increasingly present in the corporate world and has been boosted in recent years by embracing issues that seemed dormant in the financial and capital markets. The term has not only stimulated the discussion of decision-making processes considering these factors, but also is now defined as a management strategy, with its criteria converging to generate value and increase the performance of companies in the long term.
Despite not being a recent concept, ESG has been strengthened by the pandemic and demonstrated a positive impact on companies that have aligned with its main characteristics in their businesses.
Regarding the social factor, in addition to promoting respect for human rights, there are institutions that have generated well-being for their employees, peers, consumers by observing, for example, the criteria of diversity and labor rights and by having a social impact on society.
Generally speaking, the promotion of social rights is associated with public policies or the work of non-governmental organizations and other third sector institutions. However, although this promotion may have an impact on the profit expected by companies, the investment in social projects that provide improvements to the community in general is possible through investment vehicles called “social bonds.” These bonds direct their resources to resolve issues related to education, housing and criminality, among others, by reducing bureaucracy and guaranteeing the effectiveness of public policies. At the same time, investors can use their revenue in social impact projects and obtain a financial return for this service.
Social bonds can be defined as a legal transaction that aims to develop a social impact project. In other words, it is destined for the resolution of a collective problem that, as a rule, would demand state intervention. Following this assumption and using a government contracting model, it is possible that a private entity will be remunerated by the state. However, it is also possible to issue a social bond without state intervention, thereby seeking to facilitate social projects that may have varied financial returns. These projects provide opportunities for investors to make investments not only with a social but also a financial return, or even as philanthropic alternatives or as a mix of philanthropic and financial investment. The fact that the resources are directed to a social enterprise is not necessarily synonymous with an absence of profit.
Because ESG appreciates the environment, social and governance aspects in the values, culture and initiatives of a company, it strengthens the securities that have investments attached to these assets, such as green bonds and social bonds. From this viewpoint, the issue of a social bond can be used to attribute value to a determined company in order to characterize and evidence not only its commitment to its internal organization but also to society in general.
Finally, it is important to emphasize that despite being conceptually defined, there is no objective definition of the criteria to be adopted to fit the ESG index. It is a process that requires a vast internal knowledge about the activity developed by the company, its shareholders, employees, consumers and suppliers. Only after this analysis is it possible to recognize the “weak” and “strong” points of the institution and then to assume targets that will potentially adapt it to this prestigious term.