Sweden’s Top Issuer of Green Bonds Opens the Door to Social Debt

The biggest issuer of green bonds in Sweden is now moving into social debt, a shift that may give the securities a stronger Nordic foothold.

Kommuninvest I Sverige AB, which sells AAA-rated debt on behalf of Sweden’s local governments, started lending money to projects that will ultimately back social bonds. Issuance will start once the portfolio is big enough, Bjorn Bergstrand, the head of sustainability at the lender, said in an interview.

The development would provide an important platform for a category of sustainable debt that’s only just starting to take off. Issuers and investors have so far focused on the E in ESG, when looking for environmental, social and governance goals to support.

With Kommuninvest stepping in, social bonds may now embark on a similar trajectory to the rise of environmental debt. Back in 2015, Kommuninvest’s decision to start issuing green bonds helped lay the foundation for that market in Sweden.

Kommuninvest brings “volume and credibility,” said Helena Lindahl, a portfolio manager at Storebrand Asset Management.

Having a major issuer back such bonds “will be a tremendous help to build the market for social bonds,” said Lindahl, who helps manage about $18 billion in fixed-income instruments.

Globally, interest in social bonds is picking up. Against the backdrop of the pandemic, sales of such instruments soared more than 700% to almost $150 billion last year, led by government issuers, according to data compiled by Bloomberg. And with a Democratic president and Senate in the U.S., issuance is expected to accelerate this year.

In the Nordic region, only two issuers have so far delved into social bonds -- Swedish real estate developer Samhallsbyggnadsbolaget i Norden AB and Finland’s Municipality Finance -- data show. That’s despite pent-up investor demand.

“We are seeing a strong and increasing interest in social bonds,” said Jacob Michaelsen, head of sustainable finance advisory at Nordea Bank Abp. “This has been particularly driven by the surge in social bond supply seen as a response to the Covid crisis. In the Nordics, social bonds have been lacking in supply.”

Bergstrand agrees and says Kommuninvest’s program “gives investors access to a new type of sustainable finance instrument, which has to date been lacking, particularly in the Swedish market.”

“Some people will ask, do you need this in Sweden? Do you really have social challenges?,” Bergstrand said. “We definitely do.”

Local governments in Sweden are responsible for providing health care, housing and education, and their budgets make up 70% of the country’s public-sector spending. They can borrow only to make investments, not for operations.

Bergstrand said that four projects have so far been approved for the social bond program, representing about 462 million kronor ($56 million).

With transparency a key investor concern, Kommuninvest says it will provide its own evaluations of how well borrowers live up to their pledges.

Lindahl at Storebrand says she’s so far been “rather skeptical” about social bonds, because calculating the likelihood of specific targets being met is “very difficult.” Kommuninvest stepping in will help address that concern, she said.

©2021 Bloomberg L.P.

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