SSE Working Paper Series in Business Administration,
Stockholm School of Economics

Abstract: The report examines the role that Swedish institutional investors might play in the development of a Swedish market for sustainability-related and socially labelled bonds. Engagement by the financial sector is seen as a necessity for society’s ability to cope with the growing stress on welfare systems and the demands presented in the 17 United Nations Sustainable Development Goals (SDGs). While Sweden has been in the foreground with green bonds, the country is lagging behind many other western liberal market economies on social bonds. A point of departure for this research has been to better understand SDG 11, on the development of sustainable cities and communities, and what are viewed in Sweden as run-down and socio-economically weak suburbs. Drawing on international experience of sustainability-related and socially labelled bonds as well as previous experience of Swedish impact investing, the report analyses the drivers of and forces constructing this virgin market, zooming in on the role taken of three parties: institutional investors and the issuers, mainly local governments and property developers, with the financial sector acting as intermediary. The report finds that the institutional investors have taken a variety of approaches to social bond investing, which is an indicator of a lack of guidance from both the individual investor-organizations’ boards as well as the Swedish public. In the few cases where investments have been made, previous experience of both green investing and foreign social bonds were used as stepping stone. Overall, knowledge is weak, in relation to both evaluating risk and return and understanding the impact metrics linked to the bonds’ use of proceeds. Furthermore, potential Swedish issuers are yet to come forward. As is the case in other western countries, Swedish public financial institutions – such as the export agency and a government sponsored mortgage lender, appears to be at the forefront. Nonetheless, Swedish local governments, which play a central role in the high-tax economy’s delivery of public services, remains hesitant, prevented by the limited successes of previous experi-mentation with social financial instruments such as public social investment funds and social impact bonds. This is compounded by restrictive accountancy practices, organizational silos and a culture that shuns public-private collaborations. The report makes recommendations on how to help the socially labelled bond-market achieve take-off, such as enhancing the development of financial vehicles, private as well as government-sponsored, and speeding up the work with the development of standardized metrics. In addition, institutional investors need to step up, and be braver than they are currently – at least if they claim to take all the SDGs seriously. A key message to the issuers is not to ask for too much in relation to risk-sharing – socially labelled bonds must not be too complex in structure or too complicated to evaluate for investors. However, the grand message from the report, is just the spreading of knowledge of the value of developing a market for socially labelled bonds, and the role that domestic institutional investors can play, if they decide to increase their commitment.

Keywords: Institutional investors; impact investing; socially labelled bonds; sustainable development goals; Sweden; social democratic welfare state

75 pages, December 20, 2019

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