How to Report on the Social Impact of Your Social Bond Issuance

The International Capital Market Association (ICMA) has published an updated version of the "Harmonised Framework for Impact Reporting for Social Bonds" (the "Handbook") as of September 2024.

The Handbook provides essential guidelines and recommendations for issuers of social bonds, aiming to enhance transparency and standardize reporting practices.

Background

Social bonds are bond instruments the proceeds of which are applied to finance or re-finance eligible social project that have the objective to address or mitigate specific social issues and/or seek to achieve positive social outcomes. In the absence of specific regulation for social bonds, ICMA developed global issuance standards for the international sustainable bond market including the Social Bonds Principles (SBP) which are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the social bond market by clarifying the approach for issuance of social bonds.

The SBPs rests on four core principles:

• Use of proceeds – the proceeds of issue should be applied to social projects;
• Process for project evaluation and selection – the issuer should transparently communicate the process for evaluating and selecting social projects to investors;
• Management of proceeds – the proceeds from the social bond should be tracked and allocated to the specific projects they are intended for; and
• Reporting – issuers are required to provide annual reports detailing the allocation of bond proceeds and the anticipated impact of those allocations.

The Handbook provides guidance on the implementation of the last principle –reporting– and provides key recommendations to promote transparency and standardization in impact reporting.

The updated Handbook is a valuable resource for issuers of social bonds, as it helps them to communicate the use of proceeds and the expected social impact of their projects to investors and stakeholders. By following the core principles and recommendations of the Handbook, issuers can demonstrate their alignment with the SBP and contribute to the development of a credible and robust social bond market. The Handbook also provides specific guidance for the affordable housing sector and plans to expand its coverage to other eligible social project categories in the future.

Key Recommendations of the Handbook

The core principles broadly cover the following aspects:

• Reporting frequency and content. Issuers should report at least annually on the use of social bond proceeds and their expected social impacts, using both qualitative and quantitative indicators, preferably core impact metrics proposed in the Handbook.
• Reporting period and process. Issuers should define and disclose the period and process for including and removing projects in their report, based on their eligibility, allocation, and performance criteria.
• Allocation of proceeds. Issuers should indicate the total amount and the amount of social bond proceeds allocated to eligible projects and explain their approach and criteria for allocation. They should also provide a list of projects or a portfolio of projects to which social bond proceeds have been allocated, and identify the social project categories, the target populations, and the alignment with market-wide social or development objectives, such as the Sustainable Development Goals.
• Impact reporting. Issuers should illustrate the expected social impacts or outcomes of the projects or portfolio of projects, based on ex-ante estimates or ex-post results where available. They should report the pro-rated share of the overall impact results and use relevant sector specific core indicators for comparability and transparency. For comparability purposes, they should also disclose the methodology and assumptions used for the calculation of social indicators, and provide qualitative information on the context, risks, and externalities of the projects.
• Impact confirmation on target population. Issuers are encouraged, but not required, to collect impact data from the target population whose lives the social bond proceeds are intended to impact, to assess the effectiveness and accuracy of the impact reporting. This can be done pre-issuance or post-issuance, by the issuer or with the support of a third-party and should be disclosed in the social bond framework and impact reports.

The Handbook also provides three annexes that support the core principles for reporting:

• Annex I explains the concept and process of impact confirmation on target population, and provides examples of how it can be done and disclosed. It distinguishes between:
• Pre-issuance reporting to verify the robustness or accuracy of assumptions used to describe how the “use of proceeds” will benefit the target population and to select the relevant impact metrics for post-issuance disclosure, and
• Post-issuance to verify whether impact reports are based on actual outcomes experiences by the target population.
• Annex II provides an illustrative summary template for the social project-by-project report, covering quantitative and qualitative information that issuers can adapt to their own circumstances.
• Annex III provides a non-exhaustive list of sample social indicators, based on output, outcome, and impact definitions.

Sector specific guidance – Affordable Housing

The SBP explicitly recognize several eligible project categories: affordable basic infrastructure, access to essential services, affordable housing, employment generation and programs to prevent/alleviate unemployment, food security and sustainable foods systems and socioeconomic advancement and empowerments.

The Handbook in addition to providing guidance on the core principles for impact reporting, templates and sample of social indicators, it aims to provide specific guidance for these specific projects categories starting with affordable housing and planning to develop guidance and metrics for other categories in the future.