Social bonds are emerging as an important tool in sustainable finance, allowing capital to be directed toward projects with measurable social impact. This blog explains what social bonds are, the principles governing them, and their growing role in India’s evolving bond market.
Sustainability is more than just reuse, reduce, and recycle. Practicing sustainability needs responsible decisions in every aspect of our lives, and investors today are doing just that. They want to know how the businesses they invest in affect people and the planet, not just how much profit these assets fetch them.
In the debt market, this has led to the issuance of instruments that link funding directly to predefined social outcomes. These instruments are commonly known as social bonds. They help raise capital exclusively for projects such as affordable housing, healthcare, education, and rural infrastructure, while continuing to offer predictable, bond-like returns to the investors.
In the sections ahead, we will discuss what social bonds are, their key principles, how they are issued, and much more.
What are Social Bonds?
Social bonds are specialized fixed-income instruments issued to channel capital exclusively towards initiatives that deliver social value. Unlike regular bonds, where proceeds can be used for any corporate or government purpose, the money raised through social bonds is committed for initiatives such as affordable housing, education, healthcare, clean drinking water, or improved transportation.
But how can investors be assured that the money raised by these bonds is truly channeled toward credible social projects? The answer lies in a globally recognized framework, defined by ICMA, that sets out key principles to guide the issuance and use of social bonds.
Key Principles of Social Bonds
The International Capital Market Association (ICMA) has outlined a set of voluntary global guidelines, known as the Social Bond Principles (SBP). The following principles define how social bonds can be structured, issued, and reported.
- Cause of the raised funds: The issuer has to clearly disclose how the money raised will be used.
- Project evaluation and selection: Issuers must define how they select and assess projects, ensuring alignment with social objectives, and effectively managing risks.
- Management of proceeds: Proceeds must be tracked through dedicated accounts or portfolios, with internal processes (and often external audits) to ensure accuracy.
- Reporting of specifics: Investors must receive regular updates on project specifics, allocations, and quantifiable impact metrics. Here, transparency fosters enduring trust.
Issuers have to follow these guidelines to demonstrate their honesty, and investors are reassured that their money is making a real difference in society.
With the guiding framework established, it becomes easier to see how social bonds move from intent to execution through the issuance process.
How are Social Bonds Issued?
Social bonds are issued by following the same core mechanics as regular bonds. Banks and underwriters structure these bonds by specifying key parameters like the interest rate, maturity, and issue size, all based on market conditions and the issuer’s creditworthiness.
Issuers typically engage independent reviewers to assess alignment with recognized global frameworks. This external assessment helps investors evaluate whether the bond’s stated social objectives and reporting commitments meet accepted standards. After issuance, investors receive interest payments in the same manner as any other bondholder.
Some of the major social bond issuers in India include governments including local municipal bodies, development banks like National Bank for Agriculture and Agriculture and Rural Development, private or public corporations who are fulfilling their ESG duties, and other financial institutions.
To see how social bonds are taking shape in India and why more issuers are turning to them; let’s look at a representative issuance in practice.
The Growing Trend of Social Bonds in India
In 2023, the National Bank for Agriculture and Rural Development (NABARD) became the first entity in India to issue “AAA-rated social bonds” under SEBI’s new sustainable finance framework. The issuance was worth ₹1,040 crore, and the bonds were listed on the BSE.
This development was built on earlier outcome-based financing efforts in India, including the collaboration between the Pimpri-Chinchwad Municipal Corporation (PCMC) and the United Nations Development Program (UNDP) on the country’s first Social Impact Bond, which helped familiarize investors and policymakers with impact-linked structures.
Since its first issuance, social bonds have steadily moved beyond being a one-off ESG instrument to a growing financing channel in India’s debt markets. According to Climate Bonds Initiative data, Indian issuers accounted for seven aligned social bond deals in 2024 alone, taking the cumulative issuance to USD 6.6 billion across 11 deals by the end of 2024.
This steady pick-up in issuance reflects more than regulatory support; it points to clear benefits that both issuers and investors are increasingly recognizing.
Benefits of Social Bonds
Like any financial instrument, social bonds come with both strengths and limitations. Understanding both sides helps investors and issuers make informed decisions.
- Mobilizing capital for social good: Social bonds channel private and institutional capital into projects that address essential social needs such as housing, healthcare, and education. This creates a structured funding route for initiatives that deliver measurable community impact.
- Tax incentives: In some cases, social bonds may offer tax benefits under applicable regulations, improving post-tax returns for investors. These incentives can make them more attractive than conventional debt instruments.
- Lower default risk: Since social bonds typically fund essential services, the underlying projects tend to be more stable and less cyclical. This can reduce repayment risk compared to bonds linked to discretionary or volatile sectors.
- Reputation & ESG alignment: Issuers strengthen their ESG credentials by aligning fund-raising with social objectives, enhancing stakeholder trust. Investors gain exposure to sustainable finance without compromising fixed-income predictability.
- Wider investor base: These bonds appeal to a growing segment of ESG-conscious investors, helping issuers diversify their funding sources while reducing dependence on a narrow investor pool.
While these advantages explain the growing appeal of social bonds, they do not present a complete picture on their own.
Challenges of Social Bonds
Despite their advantages, social bonds also come with certain limitations that investors need to consider.
- Risk of mismanagement: Poor planning or weak execution can lead to project delays, which in turn raise concerns about repayment.
- Possibility of misuse: In some cases, corruption or a lack of transparency can divert funds from their intended purpose.
- Complex monitoring: Regular impact reporting is resource-intensive and not always executed effectively.
- Default risk: While lower than some instruments, defaults are still possible if projects fail to generate the expected outcomes.
Understanding these risks allows investors to approach social bonds with informed expectations and a more disciplined investment framework.
With both the opportunities and risks clearly laid out, the next logical question is how investors can actually access social bonds within India’s regulated debt markets.
Who Should Consider Investing in Social Bonds?
Not every investor is a good fit for every financial product, and social bonds are no different. They are made for those who want their money to do more than generate profits; they want it to make a genuine difference in society. Here are the types of investors who can invest in these bonds.
- ESG-conscious investors: Social bonds offer a straightforward means of matching capital with effect for investors and funds that place a high priority on environmental, social, and governance objectives.
- Institutional investors: Institutions including pension funds, insurance companies, and sovereign wealth funds, often seek stable, and long-term returns. Social bonds offer this, along with the added benefit of measurable social outcomes.
- Philanthropic organizations: Charities and foundations that traditionally focus only on grants can use social bonds as a tool that combines financial sustainability with impact delivery.
In essence, social bonds suit investors who want their portfolios to reflect both financial intent and social responsibility, by offering them an opportunity to contribute to shaping inclusive and sustainable growth.
There is another asset called Social Impact Bonds or (SIB), more suited for investors who are comfortable with more risk. Social impact bonds work on a ‘pay for success’ model. Investors who allocate funds to these bonds get repaid if the program successfully achieves its pre-defined goals (like reducing homelessness or recidivism).
Coming back to the topic at hand, we have multiple investment routes available for social bonds. Let’s now understand how one can invest in these bonds.
How to Invest in Social Bonds in India
Investing in social bonds in India follows largely the same routes as investing in other fixed-income securities. Following are the channels through which people can invest in social bonds in India.
- Primary issuances
Social bonds are issued by public sector institutions, financial institutions, and corporates through primary bond offerings. These issuances are regulated by SEBI, ensuring proper disclosures, use-of-proceeds clarity, and impact reporting under India’s sustainable finance framework.
- Secondary market purchases
Once issued, social bonds can be bought and sold on stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). This route provides liquidity and allows investors to enter or exit based on prevailing yields and prices.
- Indirect exposure through funds
Retail investors who cannot access bonds directly can invest via debt mutual funds or ESG-focused funds that allocate a portion of their portfolio to social bonds. This offers diversification and professional credit assessment.
With clear access points across primary issues, secondary markets, and other funds, investors can choose an entry route that aligns with both their capital size and intent.
The Future of Social Bonds in India
In India, social bonds are gradually evolving from a niche ESG instrument into a practical financing channel for priority sectors where public funding alone falls short.
As regulatory clarity improves and impact disclosure standards mature, social bonds are likely to see wider adoption by PSUs, financial institutions, and large corporates. Over time, they could help deepen India’s bond market by expanding its investor base while quietly redirecting capital toward structurally underserved segments of the economy.
