Social bonds could help mitigate the economic damage caused by the COVID-19 pandemic, at least in the short term. While on the surface, most bond issuances appear well-intentioned, all market participants need do their homework to ensure they are directing capital to the right social causes.
In April 2020, with the world gripped by the pandemic, global issuance of social bonds – debt tied to causes such as providing unemployment support or funding medical research – overtook the volume of green bonds issued.
By mid-year, issuance of social bonds in 2020 had already surpassed the volume that came to the market in the whole of 2019. S&P Global Ratings predicts that by year-end, as much as USD 100 billion worth of social securities would have been issued.
Volumes have been bolstered by the presence of select mega-issuers, particularly in Europe, including the EU’s EUR 100 billion Support to mitigate Unemployment Risks in an Emergency (SURE) programme giving member states the financial means to fight the negative economic and social consequences of the coronavirus outbreak.
Other government-backed programmes, for example, have turned to issuing debt to bolster unemployment initiatives, helping preserve jobs amid the severe economic shock.
Emergency response: As with any disaster, the pandemic calls for solutions to tackle the short-term impact and to rebuild over the medium term. Looking at the immediate future, social bonds appear to be well placed to address pressing needs as the pandemic continues.
The definition of what constitutes a social bond is broad. In the context of the virus outbreak, many issues have focused on supporting the availability of medical provisions or funding critical research that could lead to epidemiological breakthroughs.
Perhaps that’s to be expected – this is, after all, a public health crisis. Issuing securities to finance the manufacturing of personal protective equipment, improve hospital access and support vaccine studies is an appropriate way of addressing the direct consequences of the pandemic.
Economic relief and reconstruction: Social bonds, however, have the latitude to address other issues that have arisen during virus-imposed lockdowns and the resultant hit to economic activity.
Securities have been issued, for example, to provide emergency funding to local small businesses forced to shutter for long periods. They have been used for unemployment compensation, supporting essential workers or providing childcare for working parents with children unable to attend school.
Data from Refinitiv shows that USD 85 billion worth of social bonds was issued during the first nine months of 2020. That compares with USD 10.6 billion for the same period in 2019. This represents a roughly eight-fold increase.
This flurry of activity has included substantial individual issues. In May, France’s UNEDIC – the body responsible for unemployment support – issued a EUR 4 billion social bond. It was the agency’s largest bond in a decade and, at the time, the biggest-ever social bond.
UNEDIC followed this up with a second EUR 4 billion bond a month later, followed by two smaller bonds for EUR 2 billion and EUR 3 billion, respectively. The agency has slated a total of EUR 15 billion worth of social issuances for 2020.
The European Union has earmarked social bonds as part of its SURE programme. The bloc recently issued a EUR 17 billion social bond, making it the largest ever.
Reports have said the bond was 13 times oversubscribed. The EU has said it is planning to issue EUR 30 billion worth of social debt in 2020 and will continue raising capital for social securities in 2021. Overall, the bloc is planning EUR 100 billion by 2026. European officials have said its entry into the social bonds space will likely triple outstanding global debt tied to social causes.
Both the EU and UNEDIC’s issuances will see proceeds used to help companies preserve jobs. This, in turn, bolsters the employment of workers who otherwise would be facing lengthy periods of unemployment.
Amid the popularity of social bonds, it should be noted that not all are created equal. As investors, we need to be on the lookout for ‘social washing’ – the prospect that issuers say proceeds will go to certain causes before directing funds elsewhere, for example, social areas that are not maximising their positive impact on society.
In June, the International Capital Markets Association updated its Social Bond Principles – SBP, expanding the number of projects it considers eligible for funding by these securities.
At BNP Paribas Asset Management, we assess social bonds based on these principles. In particular, we verify the alignment of the social ‘use of proceeds’ against SBP-eligible categories and their contribution to ‘social-SDGs’.
For instance, proceeds from the SURE social bond programme are fully aligned with the SBP category “Employment generation, and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises, including through the potential effect of SME financing and microfinance”.
In addition, the SURE programme contributes to SDG 8: Decent work and economic growth.
We expect issuers to manage and mitigate the side-effects of their social bond projects and to ensure that there is clear and transparent mechanism for project selection and reporting the social benefits. We ask issuers to provide an impact report on these benefits. We aim to engage with the issuer on the challenges and opportunities of their social framework.
BNPP AM is a great supporter of the social bond market. We aim to contribute to it by including high-quality social bonds in our portfolios and engaging with issuers to avoid reputational issues.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
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