Bringing a social mandate to capital markets
In April, the CEB issued its first social inclusion bond, creating an innovative new way for the Bank to finance its projects. The launch has enabled the CEB to demonstrate its leading role in the social bond market, with plans to issue a social inclusion bond on an annual basis.
The CEB’s explicitly and exclusively social mandate aligns the Bank naturally with this segment of the capital market, ideally positioning it to issue “social bonds” and to allocate the proceeds from these bonds to projects that support its strategic objectives.
“There is a natural fit in the objectives of the institution and the objectives of the social bonds market,” says Arturo Seco Presencio, Deputy CFO in charge of funding activities at the CEB.
Social inclusion bond
In April 2017 the CEB issued its first social inclusion bond of €500 million with a seven-year maturity, gathering investor interest of more than €1 billion. The issuance followed a series of investor meetings across Europe to introduce the CEB’s Social Inclusion Bond Framework, which benefitted from a positive second opinion from the specialised environmental, social and governance rating agency, Sustainalytics.
In line with the Social Inclusion Bond Framework, the proceeds are reserved for financing eligible loans to support social housing, education and vocational training, as well as job creation and preservation in micro, small and medium-sized enterprises.
The banks acting as lead-managers of this transaction were Credit Agricole CIB, Rabobank, DZ Bank and Goldman Sachs International. Credit Agricole CIB was the sole structuring advisor and Pierre Blandin, Head of SSA DCM at Crédit Agricole CIB says: “Crédit Agricole CIB has been honoured to advise the CEB on the structuring and the launch of its inaugural Social Inclusion Bond. Having a pure player such as the CEB bring its leadership and expertise is a key step for the development of the social bond sector.”
By issuing a social inclusion bond to finance socio-economic development in Europe, the CEB is acting in accordance with its social mandate as well as capitalising on its strong track-record of executing social investments in Europe’s communities. Commenting on the move, CEB Governor, Rolf Wenzel, says: “This landmark issuance is a proud moment for the CEB and a major step towards promoting social cohesion in Europe within the framework of the CEB’s new Development Plan 2017-2019.”
Internal collaborationWhat sets social bonds apart from regular bond transactions? The difference is the obligation on behalf of the issuers to report on how the money is spent and its impact. In line with the best market practices and recommendations from the International Capital Markets Association (ICMA), the CEB has committed to publishing its Social Inclusion Report in 2018, a year after the issuance.
The stringent reporting requirements of the social bonds demand wider internal collaboration than regular funding transactions. While many services habitually assist with preparations for such transactions, this time it was essential for the Directorate of Finance to also work hand in hand with the Loans and Social Development Directorate.
“Thanks to an excellent internal coordination and proactive teams on all sides, the transaction was seamless. This is a very good example of teamwork towards a shared objective,” remarks Seco Presencio.
The fact that the CEB already has strong monitoring mechanisms in place greatly facilitated the process. In its assessment of the CEB’s framework, Sustainalytics particularly underscored the Bank’s “robust due diligence processes to collect meaningful impact information.”
Reaching out to new investors
One of the aims of the social inclusion bond is to broaden the investor base, in line with the CEB’s funding strategy. “Our goal is to attract as many different categories of investors as possible. We have seen a lot of interest from investors who would not have ordinarily participated in our regular transaction. Some of them are not only sustainable, but exclusively social,” explains Seco Presencio.
Depending on market conditions, the CEB’s intention is to issue one social inclusion bond per year. Already this year the half-billion social bond represents a sixth of The Bank’s overall funding, which is a considerable amount.
The CEB is a member of the ICMA, an umbrella organization that includes issuers, intermediaries, investors and capital market infrastructure providers from 60 countries worldwide. The Bank has been part of ICMA’s social bonds working group since its inception in early 2016. In the same year the ICMA published guidance for issuers of social bonds, to which the CEB contributed.
According to Seco Presencio, this is important for the CEB, not just in terms of increased visibility in the field, but as an opportunity to position itself as one of the leaders of this segment. He makes parallels with the green bond market, where supranational organisations took the initiative, which then attracted a broader swathe of issuers, including banks, corporations and municipalities. “We want to create that kind of momentum in social bonds and try to bring the market to our objective, which is to enhance social cohesion in Europe,” he concludes.
Social inclusion bond in figures