UNDERSTANDING
SOCIAL BONDS

Marketing communication - For professional investors - December 2023

WHAT MAKES A SOCIAL BOND CREDIBLE?
Social bonds finance and refinance projects, assets and activities that have social benefits suchas affordable housing, improving access to credit or increasing employment opportunities.
They are a way for bond markets to contribute to actions and measures that benefit a
population or a community.
In contrast to the way that proceeds raised by a green bond are used, it can be challenging
to have tangible metrics to assess the ‘social-ness’ of the projects financed. There is no EU
taxonomy for social bonds unlike the taxonomy that can be used to assess green bonds. The
EU Platform for Sustainable Finance has published a draft social taxonomy, but it does notuse quantitative metrics to determine the extent of the contribution of activities to socialobjectives. It is unclear when the draft will be signed into law.

SOCIOECONOMICADVANCEMENTAND EMPOWERMENTFOOD SECURITYAND
SUSTAINABLE
FOOD SYSTEM

AFFORDABLEBASICINFRASTRUCTURE

SOCIALBONDS
ACCESSTO ESSENTIALSERVICESEMPLOYMENTGENERATIONAFFORDABLE
HOUSING

The sustainable
investor for achanging world

U N D E R STA N D I N G S O C I A L B O N D S - 2 -Based on our experience with green bonds, we believe these elements make a social bondcredible:•Ambition – This concerns the issuer’s goal to contribute to social objectives and grow theiractivities to meet those objectives.

•Integrity – This is about processes and management systems governing the proceeds,mitigating potential risks, and measuring and reporting.

•Specificity – This concerns the identification of specific target populations and the social
gaps these populations face that the issuer intends to mitigate with the proceeds of thesocial bond.

Our methodology in a nutshell:

Our Social BondMethodology Process
1 - Issuer’s ESG
Score and ambition

4 - Reporting on results

2 - Social useof proceeds

3 - Implementationof social bond project

Key considerations for each component are:1. How does the issuer rate in environmental, social and governance (ESG) terms and what is theircontribution to social objectives?
2. Which activities will the issuer use the bond’s proceeds for, and do these activities match the ICMA
Social Bond Principles?
3. How is the issuer using the proceeds? How is the issuer managing the risks or avoiding doing
significant harm? How specific are the target populations and the social issues faced by thepopulations?
4. Is the issuer reporting clearly and transparently on the allocation of the proceeds and the benefits
achieved?

SCORINGWe assess component one, two and three ex-ante (i.e., before issuance of the bond). We assesscomponent four ex-post (i.e., 12 to 24 months after the bond has been issued).
We score each social bond out of 100 points. The score corresponds to a rating of Positive, Neutralor Negative.
Social bonds from developed market issuers must score at least 50 to be rated Neutral and at least
70 to be rated Positive. They are rated Negative if they score below 50.
Social bonds from emerging market issuers must score at least 30 to be rated Neutral and at least
50 to be rated Positive. They are rated Negative if they score below 30.

U N D E R STA N D I N G S O C I A L B O N D S - 3 -Across the lifecycle of the bond, we monitor for controversies or high reputational risks related tothe social bond. Our sources include our portfolio managers and rating agencies. When we believe
the controversy or reputational risk is substantial, we will adjust our score and change the rating toNegative.
To enhance our methodology periodically, we may use research and ideas from investment banks, nongovernmental organisations, academics, industry associations, consultancies, and rating agencies.

DETAILS OF EX-ANTE ASSESSMENT•

Issuer’s ESG score and ambition - We review the issuer’s ESG characteristics. Specifically, where
the issuer’s ESG score is in the bottom 10% of its peer group, we automatically rate the social
bond Negative since we believe that the issuer is unlikely to carry out the projects and activities
financed successfully and credibly. We also assess how the social bond fits with the issuer’sambition.

•Eligible projects – We determine whether the use of proceeds can be mapped to the categories
in the ICMA Social Bond Principles, e.g., providing affordable basic infrastructure or improving
access to essential services.

•Implementation of projects – We assess whether the issuer respects the ‘Do No Significant Harm’principles such as due diligence of users of credit to ensure the proceeds are used responsibly.
We also use the issuer’s historical controversies in related activities as an indication of how likely
the social bond projects will avoid significant harm. In addition to the ‘Do No Significant Harm’principles, we look at whether the issuer will prioritise new financing over refinancing, and in
the event of refinancing, the look back period allowed. Importantly, on the notion of specificity,
does the issuer identify the target populations and the social gaps these populations face (e.g., alack of accessible dwellings for low-income groups) that the issuer intends to mitigate with theproceeds? We look for specificity and clarity in these definitions.

DETAILS OF EX-POST ASSESSMENT• Reporting on results – We determine whether the issuer has reported on their social bond 12 to24 months after issuance. If there is no report at the time of our assessment, we will engage with
the issuer to understand the situation. Where the issuer confirms that there is no reporting andthere is no intention to report on their allocation and the benefits of the proceeds, we will rate
the bond Negative. Where there is a valid report, we assess how the proceeds were allocated andwhat the benefits were. We also review the issuer’s methodology for measuring the benefits. We
believe issuers should obtain third-party verification or assurance on the numbers disclosed in thereport as best practice. Finally, we are looking for further details from the issuer on how the bondcontributes to their sustainability ambition.

U N D E R STA N D I N G S O C I A L B O N D S - 4 -ENGAGEMENTEngagement with social bond issuers is key to achieving and improving the benefits of social bonds,
but also protecting clients’ investments from the potential risk of ‘reputational washing’.
•At-issuance engagement: We focus on 1) an issuer’s sustainability credentials and integrity, 2) thetype of project, and 3) the bond’s proposed ambition, expected allocation and implementation. Aproject’s limited ‘social-ness’, a weak issuer ESG rating or unsatisfactory engagement feedback
may result in a Negative rating.

•Engagement after investment: We focus on output and impact indicators and the actual project
allocation. If the issuer fails to provide a satisfactory explanation for not providing impact
indicators, we may give the bond a Negative rating.

SOCIAL BENEFITS
In contrast to green bonds where the benefits may be measured primarily in terms of avoidedemissions, the benefits of social bonds can vary depending on how the proceeds are used. For
example, a social bond financing affordable housing may measure its benefits using number of units
built and number of households benefiting from the affordable housing. A social bond financing loans
specific to small and medium-sized entrepreneurs from a selected area may measure its benefits
using number of borrowers and number of new jobs created by the borrowers. Regardless of theprojects, we believe that transparency by the issuer on how the benefits are measured is critical for
us to continue to regard the social bond as credible.

Also read:Social bonds – A tool to effect positive social change (bnpparibas-am.com)
Social bonds – A better outlook (bnpparibas-am.com)

U N D E R STA N D I N G S O C I A L B O N D S - 5 -INVESTMENTS RISKS
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The sub-fund may be exposed to specific risks listed below:•••Credit Risk
Extra-Financial Criteria Investment Risk / Environmental, Social and Governance (ESG)
investment Risk
High Yield Bond Risk

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