On the 7th of June, 2021, the Securities and Exchange Commission ("SEC") ("the Commission") published its proposed Rule ("Rule") on Social Bonds in the Nigerian Capital Markets. The Rule, according to the Commission, was borne out of the increased volume of social bonds issued in 2020 (85$ billion), which was 8 times higher than the volume issued in 2019 ($10.6) billion, and the key rise in ethical investments by investors as well as the government.  

In this short article, we have highlighted the key elements of the Rule and the possible impacts of social bonds in the Nigerian Economy.

MEANING OF SOCIAL BONDS

According to the Rule, "Social Bond" means a type of debt instrument, where the proceeds would be exclusively applied to finance or refinance new and/or existing eligible projects with clear and identifiable social objective(s) and which are dedicated to an identified population. In other words, social bond aims at creating funding for public sector projects with the goal of achieving better social outcomes within the society.

The Rule defines "Social Projects" as a project directly aimed to address or mitigate a specific social issue and/or seek to achieve positive social outcomes whether or not exclusively, for a target population.

WHO CAN ISSUE A SOCIAL BOND UNDER THE RULE?

The Rule does not explicitly mention the category of people eligible for the issuance of Social Bonds. However, we are of the opinion that both the public sector and the private sector are eligible to issue it, provided other conditions which are contained in the next heading, are complied with.

CONDITIONS FOR APPROVAL OF A SOCIAL BOND

The Rules highlights the basic conditions prospective issuers of Social Bonds must satisfy, which, in addition to the general registration requirements for debt issuance contained in other SEC Rules, include:

  1. A letter committing to invest all the proceeds of the bond in projects that qualify as social project(s) or assets
  2. A feasibility report stating clearly, the measurable benefits of the proposed social project or assets
  3. A prospectus which shall disclose the social objectives, project selection criteria, decision-making procedures, social and environmental benefits, risks associated with the projects, use and management of the proceeds.
  4. An independent assessment or certification issued by a professional certification authority approved or recognized by the Commission
  5. Any other documents as may be required by the Commission from time to time.

THE ELIGIBLE PROJECTS UNDER THE RULES

As earlier stated, the main purpose of social bonds is the financing of certain 'eligible projects', for social impacts. The Eligible Projects according to the Rule, include:

  1. Affordable basic infrastructure like clean drinking water.
  2. Access to basic services like health or education
  3. Affordable housing
  4. Job creation including through the potential effect of small and medium-sized enterprises financing and microfinance
  5. Food security
  6. Socioeconomic advancement and empowerment
  7. Any other social project as may be approved by the Commission from time to time.

WHO IS THE TARGET POPULATION FOR SOCIAL PROJECTS?

Social Projects should be dedicated to one or more of the following identified target populations:

  1. people living below the poverty line;
  2. excluded and/or marginalised populations and/or communities;
  3. vulnerable groups;
  4. people with disabilities;
  5. migrants and/or displaced persons;
  6. undereducated population; and
  7. underserved population, due to lack of access to essential goods and services and
  8. unemployed persons.

UTILISATION OF FUNDS

The Rule provides that the proceeds of the Social Bond shall be used solely for the purposes stated in the approved offer documents, deployed within the given timeframe prescribed in the document. The amount must be domiciled with a custodian in an escrow account of which the issuer and the Trustees shall be signatories. Unallocated proceeds are to be invested by the Trustees in money market instruments aimed at positive social outcomes but not exclusively for the target population. 

SOCIAL BOND REPORT AND ASSESSMENT REPORT

Throughout the duration of the bond, the issuer shall issue, at least annually, a Social Bond Report containing the list of projects and assets to which proceeds have been allocated. The Social Bond report will also include description of the projects and amounts disbursed, expected impact of the projects, performance indicators and impact measures including the methodology for arriving at same. In addition to the Social Bond report to be published and filed by the issuer, an independent professional assessment or certification agency is also expected to be engaged to conduct annual follow-up assessments and issue its own reports, called an assessment report, which shall also be filed with the Commission and published online.

OTHER PROVISIONS

The proposed Rule also contains provisions for disclosures towards refinancing and external reviews. The external review is meant to confirm the alignment of the proposed bonds with all components of the Social Bond Principles, and it may be total or partial.

POSSIBLE IMPACTS OF SOCIAL BONDS FOR THE NIGERIAN ECONOMY

In developing countries like ours, with limited fiscal capacity, the issuance of social bonds is paramount to keep essential industries afloat as the proceeds from these social bonds will be utilized to ensure that social economic development is not placed on hold. Unlike ordinary bonds, social bonds disclose exactly how their proceeds are used which is an attractive prospect for institutional and millennial investors who want to know how their money are used.

CONCLUSION

Social Bonds are a welcome opportunity for private and public sector partnership, and this is particularly welcome in Nigeria to deal with social issues which have been a barrier to economic development. The SEC's Proposed Rule will serve the purpose of assuring investors that their social contributions are utilised properly while implementing philanthropic or developmental efforts, ensuring transparency and accountability and preventing the diversion of funds.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.