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