Corporate Social Bonds: A Legal Analysis

Abstract

Empirical studies carried out at the European Union level show that banks and institutional investors (mainly pension funds and insurers) increasingly make their investment decisions taking into account the positive social and environmental impact of the organisations, businesses, and projects they invest in. Such investment strategies are commonly identified as ‘sustainable finance’ or ‘sustainable and responsible investments’. Within the many forms of sustainable and responsible investments, social bonds have recently started to spread, with the green bond market leading the way.
The paper focuses on social bonds, which are debt securities whose proceeds are partially
diverted from bondholders in order to finance eligible social projects or ventures (the so-called beneficiaries). The social bond market is characterised by the absence of a specific legal framework, thus requiring focusing on market practice and private guidelines.

The paper investigates the contractual design of social bonds and the main critical legal aspects and potential weaknesses of these financial instruments as developed in practice. The analysis considers mechanisms to ensure the allocation of proceeds towards the social impact; monitoring tools and procedures of both the beneficiary’s and the issuer’s behaviour; the effectiveness of enforcement mechanisms in case of non-fulfilment; processes for information disclosure; and the role of independent review providers. While some of these instruments could be introduced in the contractual design of the bond or in guidelines for voluntary adoption, regulatory intervention, possibly at the European level, clarifying the nature and core characteristics of social bonds may be useful.