Community Finance | April 23, 2020

Countries and companies tap fixed-income market with ‘social bonds’ for COVID relief

Dennis Price and David Bank
ImpactAlpha Editor

Dennis Price

ImpactAlpha Editor

David Bank

ImpactAlpha, Apr. 23 – Governments are not the only source of quick liquidity in the COVID crisis. 

Countries and corporations are tapping a growing corner of the $100 trillion global bond market with designated ‘social’ and ‘sustainability’ bonds. The offerings pledge proceeds to COVID-related projects like small business support, healthcare or public health solutions and new technologies and medicines.

The global pandemic has pushed such bonds into the role that in recent years has been played by green bonds, which raised $258 billion last year. Both are safe and well-understood instruments from high-quality issuers that come with the added sheen of equity and social progress.

Indeed, as issuances of social bonds have soared in the past month, green bonds have stalled. 

With central banks running out of options and government relief funds quickly tapping out, such bonds may be a way for private capital to play a larger role in financing the COVID response and recovery.

“Social bonds are essential to containing the economic fallout of COVID-19 and building resilience against future shocks,” Nyshka Chandran writes in Foreign Policy. “Their proceeds could waive health insurance costs, subsidize pharmaceuticals, and support small businesses to prevent insolvencies.” 

Social is the new green

Even before COVID, social bonds were increasing in prominence as a growing number of issuers have been linking strategies to the U.N. Sustainable Development Goals. “Sustainability bonds,” which allow issuers to allocate to both environmental and social projects grew three-fold in 2019 to $65 billion. Social-only bonds grew 40% last year to $20 billion. Both categories were dwarfed by green bonds, which reached a record $258 billion in 2019.

Sustainalytics tallied total global issues of social bonds at $13 billion last year, with $40 billion for sustainability bonds.

But green bonds have stalled in the crisis, with issuances falling to just over $5 billion in March from $15 billion in March 2019.

The COVID crisis has accelerated issuances of social bonds, as corporations and companies tap “the scale and depth of the capital markets to be able to help fund some of the much needed social investments and help them with the COVID challenges,” says Kyung-Ah Park of Goldman Sachs, which has underwritten $18 billion in COVID-focused bonds so far in 2020. 

Goldman Sachs sees rise of the “S” in ESG investing

Familiar instruments

Like green bonds, social and sustainability bonds are investment grade and backed by the full credit of the issuers. Philips and Pfizer are among the corporate giants that have issued “sustainability bonds” greater than $1 billion that will target at least some of the proceeds to COVID responses. In China, dozens of companies have issued ‘virus control’ bonds.

Development banks in Africa, Latin America and Europe have issued billions in “COVID bonds.” Indonesia, Austria and the Nordic Investment Bank have all tapped bonds markets for pandemic relief funds. 

“As impact investors, we have a role to play in channelling sources of capital into investments that have the potential to contribute to today’s most difficult societal challenges,” said BlueOrchard’s Philipp Müller. Blue Orchard invested in the International Financial Corp.’s Covid-19 social bond.

Goldman underwrote Indonesia’s 50-year dollar bond to fight the pandemic, a $3 billion social bond from the African Development Bank and a $2 billion Sustainable Development Bond from the Inter-American Development Bank.

It also led a €7.5 billion issuance from the Republic of Austria, which will support a €4 billion COVID-19 emergency fund and a €1.5 billion issuance from the French Development Agency.

Issuers have “focused mainly on issuing green bonds over the past years, but given the current pandemic, we expect to see a steep increase in social and sustainability bonds in the coming months,” said Julie Becker of the Luxembourg Stock Exchange, which last week waived fees for COVID-19 response bonds. 

Social bonds are distinct from “social impact bonds,” which only repay investors if outcomes targets are hit. Sir Ronald Cohen is proposing a “pay-for-success” bond, to the tune of $10 billion, to purchase COVID tests at a pre-agreed rate.

Needed: New models for ‘pandemic-lens investing’

Social bonds should also be distinguished from “catastrophe bonds,” like the World Bank’s pandemic bond. That bond was designed in 2017 in the wake of the Ebola outbreak to payout in the event of another pandemic and provide “surge funding” to low-income nations (see, “Amid wave of COVID relief bonds, the World Bank’s pandemic bond has yet to pay out”). The bond triggered earlier this week, requiring it to pay out $133 million to the poorest nations affected by the pandemic.

Voluntary oversight

Social bonds have their own set of voluntary “principles” that include guidance on use proceeds, processes for project selection, management of process and reporting, according to the Social Bond Principles of the International Capital Market Association, a capital markets trade association.

Use of proceeds from social bonds, for example, include the provision of basic infrastructure, affordable housing, food security, healthcare, socioeconomic advancement or other essential services. 

Regulators such as ICMA and other ratings agencies have rushed out and updated guidelines and taxonomies to support the growing market for COVID bonds, provide standardization and ensure proceeds are used as intended. 

ICMA guidelines on how to use social bonds in response to COVID-19 suggest proceeds be used for “healthcare services and equipment, medical research, SME loans that support employment generation in affected small businesses, and projects specifically designed to prevent and/or alleviate unemployment stemming from the pandemic.” 

Sustainalytics, a sustainability ratings agency, has expanded its internal taxonomy to include healthcare and socio-economic impact mitigation as uses of bond proceeds related to the virus. 

Social bonds targeting COVID-19 “must abide by” the four core components of the ICMA’s principles, says the International Finance Corp., which last year issued $1.5 billion through 28 social bonds. “It is essential that proceeds of the bonds go exclusively towards addressing or mitigating social issues wholly or partially emanating from the coronavirus outbreak.”