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QB 01/2022 – Social Bonds for an inclusive access to credit

According to a recent study, 93% of all institutional investors consider evidence of ESG activities to be important and take it into account when it comes to investment decisions. Dr. Daniel Drummer, CFO with auxmoney, explains how lending platforms use ESG-compliant investment forms and why they make an important contribution to a better supply of credit.

An increasing amount of investors are integrating ESG criteria into their investment strategies. Leading lending platforms have successfully started to adapt to this. Thus, they are making an important contribution to improving the supply of credit and furthering the United Nations Sustainable Development Goals.

The demand for ESG investments is high – and the trend keeps rising. Banks, fund companies and fintechs are meeting this demand with new investment products that enable investors to invest based on environmental and social values. Lending platforms have also recently started offering ESG-related investment opportunities that investors can use to promote more inclusive access to credit to more people. An overview:

ESG is trending: The strong growth of Green and Social Bonds

ESG stands for environmental sustainability, social responsibility and good governance. Institutional investors are increasingly using ESG criteria to contribute to sustainable development with their investment decisions. As global social movements have raised public awareness of environmental and social issues, the trend towards ESG investments has accelerated significantly in recent years, driving the creation of numerous new investment products.

Green bonds, for example, which aim to fund environmental and climate protection projects, and social bonds, whose issue proceeds help to create social value, have established themselves in the bond market in recent years. According to Deutsche Bundesbank’s Green Bond Monitor study, green bonds with a global volume of 232 billion Euro were issued in 2019, compared to 252 billion Euro in 2020. In September, the issue volume for 2021 had already risen to 358 billion Euro. Social bonds also recorded strong growth in recent years: After social bonds with a volume of 16 billion Euro were issued in 2019, the figure rose to around 140 billion Euro in 2020. While the majority of this is accounted for by the EU Commission’s Corona aid programmes, more and more companies are also issuing bonds of this kind to promote positive social effects.

Financial Inclusion as a key component for the United Nation’s Sustainable Development Goals (UN SDG)

 Leveraging digital technology, ESG investment products also offer new opportunities for lending platforms that provide private individuals, many self-employed, or companies with access to financing. With their digital products, platforms often close gaps in the supply of credit and thus improve access to financing.

By promoting financial inclusion, lending platforms contribute to an essential component of the UN Sustainable Development Goals (UN SDG). According to the UN SDGs, barriers that hinder or prevent individual access to financial products are to be removed. The aim is to support sustainable development on an economic, social and ecological level. In developed industrial countries such as Germany where most of the population has a bank account we understand financial inclusion as having access to financial services, such as credit. This is often inaccessible to certain population groups.

Digital technologies and differentiated scoring enable credit access for more people

Take personal loans, for example: Many people are often inadequately covered by traditional providers. This applies in particular to groups such as the self-employed, students and apprentices, temporary employees as well as young people and population groups with a lower credit history. The reason for loan rejection is often due to a lack of data from credit agencies to assess creditworthiness using traditional risk models, as well as banks having insufficient experience with such borrower profiles.

By using technology and artificial intelligence in credit scoring, lending platforms can help reduce barriers to access and bias in lending. The intelligent combination of thousands of features, such as information from open banking and digital data points, enable a very differentiated picture of the loan applicant. This benefits borrowers of all creditworthiness classes, especially population groups that are neglected by traditional providers. Inclusive access to credit enables people to invest in their personal and professional future. It also facilitates the self-employed to grow their businesses, thus securing jobs.

Certification as a social bond highlights contribution to financial inclusion

The fact that lending platforms make an important contribution to the credit supply of people who are often not served by banks is not a new finding. As early as 2016, the German Bundesbank confirmed this in a study [1].

 What is new, however, is that lending platforms are now also accessing the public capital market to improve the supply of credit and promote financial inclusion. To this end, they are now able to place bonds whose issue proceeds are used to finance loans. For example, auxmoney recently issued a bond with an issue volume of 250 million Euro that follows the standards defined in the Social Bond Principles (SBP) of the International Capital Market Association (ICMA). The certification of this bond as a Social Bond by a renowned rating agency is a further external validation of the value-creating contribution of the platform.

Both sides ultimately benefit from the placement of such a bond: While the bonds provide the platforms with another instrument for financing loans, investors gain access to a new investment product with which they can promote financial participation for more people. The strong market response that auxmoney has achieved with the placement of its first social bond underlines the attractiveness of this segment for institutional investors.

Please find the article as PDF here.


[1] Deutsche Bundesbank Discussion Paper No 30/2016 – „How does P2P lending fit into the consumer credit market?“, page 17.