Jonathan Porteous, Partner at Stevens & Bolton, explains how innovation in the bond markets can help to tackle gender inequality.
The most recent Gender Gap report issued by The World Economic Forum, released one year after the onset of Covid-19, noted that the pandemic considerably widened the gender equality gap. It is anticipated now that it will take up to 135.6 years to close the gap worldwide, an increase of 36.7 years from previous estimates. Moreover, global GDP could rise by 3-6%, boosting the world economy by US$2.5-5 trillion, if women and men were to participate equally in the market. Since gender disparities remain a significant issue in society, investors are increasingly interested in financing products and services that aim to bridge the gender gap, which also have huge potential for increasing revenue.
ESG-labelled bonds open up alternative debt funding opportunities to source and finance projects globally. In the last few years, both public-market and private-equity gender-related investments have grown significantly, yet they still represent a minimal portion of ESG investments more broadly.
The International Capital Markets Association (ICMA), The International Finance Corporation and UN Women have recently published ‘Bonds to Bridge the Gender Gap: A Practitioner’s Guide to Using Sustainable Debt for Gender Equality’ (the Guide) to encourage the use of sustainable bonds in order to empower women and end gender discrimination through opening new finance routes.
Gender equality through sustainable finance
The Guide aims to demonstrate how gender equality goals can be included in sustainable debt products (in particular through the issuance of sustainability or social bonds), through either a use-of-proceeds or a performance-based approach. There are two approaches to issuing gender bonds – one where budget and spending are assigned to activities for developing information tools, digital platforms or other initiatives for women; the other one measures the expected outcome of a project and analyses sustainability performance targets by a given date.
The Guide builds on existing global principles set out in documentation such as the ICMA’s Social Bond Principles, Sustainability Bond Guidelines and Sustainability-linked Bond Principles and should be considered alongside them.
Use-of-proceeds approach: social and sustainability bonds
Social and Sustainability bonds are “use-of-proceeds” bonds, which require bond issuers to use all the proceeds to implement projects specified prior to the bond’s issuance.
The objective of gender equality can be:
- the sole objective of a Social bond, (a Gender Bond);
- combined with other social objectives (a Social Bond); or
- combined with green objectives (a Sustainability Bond).
Mobile telecoms provider Milicom uses proceeds from its social bonds to empower and connect women by introducing various training programmes to enhance their self-esteem, business skills and digital literacy. Foods conglomerate Danone uses its social bonds to progress gender equality in developing countries. These are just a couple of examples of where the use-of-proceeds approach has been successfully adopted.
The Guide contains examples of potential uses of both private and public sector use-of-proceeds. Examples of private sector use-of-proceeds include training suppliers to develop their awareness about gender-based violence; building local facilities that will have a disproportionately positive impact on women and girls; implementing respectful programmes to support suppliers, distributors and retailers in adopting gender-focused policies and aligning with standards for gender-responsive enterprises (such as UN Women’s Empowerment Principles). Public use-of-proceeds projects include investment in the care economy; improvement of access to information; improvement of awareness of, and accessibility to, services that prevent and respond to violence against women and girls, including sexual harassment in public spaces.
Performance-based approach: sustainability-linked bonds
A sustainability-linked bond is a performance-based bond directed at inspiring an issuer to reach certain sustainable outcomes which are determined prior to issue. Bonds with a gender equality related performance target are assessed using quantifiable key performance indicators (KPIs) at specified intervals. The cost or terms of the bond may be negatively impacted if the KPIs are not met.
This performance-based approach may be preferable to an issuer that does not have a pipeline of suitable projects, as it provides the opportunity for issuers to review their processes and recognise where gender-related commitments could be made, in order to set relevant KPIs.
Public sector issuers are encouraged to select KPIs reflecting international and national targets, frameworks and action plans. For private sector issuers, relevant considerations for selecting KPIs include information on leadership; employees; supply chain and products.
All KPIs must follow the sustainability-linked bond principles and be relevant to the issuer’s particular core business. The KPIs must also be strategically significant to the issuer, measurable, externally verifiable and benchmarked. The sustainability performance targets (SPTs) should also be ambitious and allow the issuer to show improvement in their corresponding KPIs.
The Guide includes several examples of KPIs and SPTs for the private and public sector. Examples include:
- retention of women leaders;
- reducing the gender pay gap;
- percentage of women participating in community support programmes;
- number of women in the labour force in high growth sectors; and
- number of policies adopted that address gender-based violence.
Private sector SPTs include obtaining global certification related to gender equality in the workplace, such as EDGE gender certification or the UNDP Gender Equality Seal, or achieving a gender balance among participants in community support programmes. Public sector SPTs include building quotas for facilities that provide services primarily for women and achieving a gender balance among customers.
Benefits for businesses
Gender diversity poses many benefits not just for the society as a whole, but also for businesses. Workplace diversity leads to economic gains, as women bring new skills and perspectives and therefore raise productivity and wages. Companies with gender-diverse management have 40% lower volatility in return on capital employed (ROCE). In 2018, more stable SMEs and mid-caps outperformed total small and mid-cap ROCE by 75%. There is also a positive link between corporate return on assets and the proportion of women in senior positions. Nordea in their 2018 report demonstrated that when one male member of the senior management team/board is exchanged for a female member, profitability will increase by around 3–8%, while organisations with over 20% of women in management position leads to 10% more revenue from innovative products and services. At the same time, teams with female founders perform 63% better than all-male teams. Moreover, diversity brings higher financial returns and competitive advantage. The top 25% of companies in terms of gender diversity at executive level outperformed their peers by 21% on profitability and 27% on longer-term value creation. Against this backdrop, it isn’t hard to see why investors are favouring finance options which strive for a greater gender balance in the workplace.
Potential impact of gender equality-focused bonds
There has been significant development in the sustainable finance market in recent years and investor enthusiasm for products that address social issues is constantly growing. According to ING, in 2021, corporate sustainable issuance represented 24% of total corporate bond issuance, a 13% increase from 2019. However, in 2021 only 12% of those bonds were gender-related and the rate of gender bond investing is still low, perhaps because they are currently only offered to large institutional investors thereby excluding a whole host of other potential investors which make up a large portion of the financial market.
Issuing gender bonds offers an opportunity to demonstrate leadership in evolving gender equality, to diversify investor base and influence new sources of financing. The reputational enhancement from leading on gender-related issues will also no doubt be attractive to bond issuers. For public sector issuers in particular, gender equality focused bonds could be used to address structural causes and consequences of gender-based discrimination, which has the potential for a huge impact on global economies, as noted above.
Finance options within the ESG market are growing in popularity, but sustainable finance markets have been struggling to keep up with the demand and there remains significant room for further growth. These sustainable bonds present an opportunity for capital to close the equality gap between genders, a positive outcome for community as well as the business world. It is hoped that the Guide will inspire stakeholders across capital markets to go beyond business as usual in addressing gender inequalities and find the funding opportunities that sustainable instruments present.
This article was co-authored by Kamila Gomolka, Paralegal at Stevens & Bolton.