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On October 20, the European Union crowned a triumphant year for the social bond market when it raised €17 billion of financing for its Covid-19 employment mitigation programme.
That took total issuance this year to roughly $80 billion, nearly three times the amount sold in 2019.
Social bonds have been around for a while. French industrial group Air Liquide issued a ‘socially responsible bond’ in 2012, and principles for issuance were published by the International Capital Market Association (Icma) two years later.
Yet, until this year the new instrument had struggled to gain traction, overshadowed by the rapid growth of the green bond market. In 2019, social bonds accounted for just 8.5% of total sustainable debt issuance, according to the Climate Bonds Initiative.
That all changed with the arrival of Covid. As the pandemic gathered pace, green bonds were sidelined as issuers rushed to raise funding to meet the needs of populations hit by disease and lockdown.
After Icma clarified that coronavirus relief constituted an acceptable use of social bond proceeds, sales hit $33 billion in the second quarter. Public-sector borrowers led the way, from multilateral development banks (MDBs) to European agencies such as France’s Unedic and Italy’s Cassa Depositi e Prestiti.
Given the social remit of these entities, some have questioned the worth of putting a social label on their bonds.
Susan Barron, head of green and sustainable capital markets at Barclays, argues that – for the MDBs at least – the value lies in their contribution to the development of the wider market.
“It creates precedents and guidelines that others can reference, plus it also provides an additional reference in impact reporting, which is an increasingly important aspect for investors,” she says.
The use of social bonds by European governments and agencies has also aroused scepticism in some quarters.
“Social is probably in the eye of the beholder,” says one debt capital markets banker. “I’m not sure every ESG [environmental, social and governance criteria] asset owner is going to think of their social investments as financing European unemployment benefits.”
Others clearly have fewer doubts. The EU’s debut bond under its Support to Mitigate Unemployment Risks in an Emergency (Sure) programme, which is due to raise €100 billion, attracted €233 billion of orders.
Slow off the mark
Banks and corporates have been slower off the mark in terms of social bonds, at least in the US and Europe. While Asian lenders have been active in the asset class, led by Bank of China in February, only a handful of Western banks – notably Bank of America, BBVA and CaixaBank – have followed suit.
On the corporate side, deal flow has been even lighter. Swedish ventilator maker Getinge issued commercial paper in social bond format in April and Pearson sold a £350 million education bond in June, but little else has made it to market.
Nevertheless, debt bankers see potential for a pick-up in bank and corporate social bond sales as borrowers look to finance Covid-related expenditure.
“Depending on the sector, there are several categories in which both financial institutions and corporates will have eligible projects, from affordable housing and small and medium-sized enterprise financing to education and healthcare,” says Cristina Lacaci, head of green and sustainability bonds in EMEA at Morgan Stanley.
Potential issuers will face challenges, however. For corporates in particular, size can be a problem. One banker notes that Danone, which issued the first corporate social bond in 2018, struggled to find sufficient social programmes for its £350 million deal, despite including things such as maternity leave pay.
The lack of a dedicated investor base also serves as a check on the market. While green bond funds have proliferated over the last five years, social equivalents are still few and far between. Without them, social borrowers are unlikely to be able to achieve a pricing advantage.
Bankers are hopeful, however, that this will change following this year’s surge in social bond sales.
“So far, there have been few pure social investors or bond-related strategies – but that’s partly because there were no social bonds,” says Tanguy Claquin, head of sustainable banking at Crédit Agricole CIB.
So far, there have been few pure social investors or bond-related strategies – but that’s partly because there were no social bonds
Tanguy Claquin, Crédit Agricole CIB
“It was a chicken and egg question – but clearly now we have the eggs, so I think we will see more funds like this being developed, which in turn will provide further impetus for issuers to tap the market.”
In the meantime, some green bond funds have reportedly widened their remit to include social and Covid-related bonds in response to requests from clients, while the number of general ESG bond funds has increased this year.
Philip Brown, head of public sector debt capital markets at Citi, also notes that bond buyers in general are keen to see more diversification in social themes.
“We’re swamped with SSA [sovereign, supranational and agency] social bond issuance, but investors would like to see more from corporates in response to the pandemic,” he says. “They would also like to see banks issuing Covid-related bonds directed towards lending to SMEs and job creation and retention.”
Making a difference
Social bonds and loans also offer a chance for companies to communicate their response to the pandemic to market participants and other stakeholders, says Johannes Eckardt, director, loan syndicate western Europe at UniCredit.
“Many companies that are not primarily focused on social issues and their impacts have directed a lot of financing towards that area since the start of the Covid crisis – social bonds and loans offer a great opportunity for them to highlight exactly where they have made a positive difference.”
Others argue that, by issuing social bonds, banks can play a valuable role in the development of the market.
“There is a lot of education to be done on what social really means in the context of ESG and having new products coming to market is a key part of that,” says Alexandra Basirov, global head of sustainable finance for financial institutions coverage at BNP Paribas. “It helps portfolio managers to understand what social practice looks like.”
Many issuers are looking to improve the healthcare options they provide to their employees
Lupin Rahman, Pimco
She adds that, for the banks, social bonds – like other sustainable debt instruments – have the advantage of potentially offering better market access.
“It has been proven that when markets are tough, execution risks for green, social or sustainable bonds are lower due to the supply/demand dynamics,” she says.
While some remain sceptical of the potential for social bonds outside SSA, supporters of the asset class note that the green bond market initially faced similar challenges.
“In 2013, investors were keen to buy green bonds, but there was not yet the critical mass of issuance and issuers,” says Barron.
Similarly, Claquin notes that the complaint about the lack of international alignment on definitions of social topics has echoes of the early days of green bonds.
“There is much less divergence between countries on social bonds today than there was five years ago in the green bond market, where there were very strong differences between Europe, the US and Asia,” he says.
At Pimco, portfolio manager and head of ESG integration Lupin Rahman is confident that the social bond story has a long way to run.
“There is huge potential for growth in the market given the increasing focus on ‘S’ factors since the Covid crisis,” she says.
“It is clear that health and wellbeing are going to be top of the agenda going forward, and many issuers are looking to improve the healthcare options they provide to their employees, focusing on de-risking their supply chains and thinking about how working conditions are changing.
“All of this will require financing at both issuer level and the sovereign level.”
Scope for development
Whether or not all that financing will be done via social bonds, however, is open to question. Some bankers see more scope for development in sustainable and sustainability-linked bonds (SLBs), which can include both environmental and social components.
“When it comes to corporates, I think the preferred option will be to include social projects as part of a broader sustainability bond,” says Lacaci. “That’s certainly what we’ve seen so far.”
SLBs in particular have started to gain traction this year following the publication in June of Icma principles for the asset class.
Brazilian pulp and paper group Suzano, along with Novartis and Chanel, have all issued deals over the last two months in the format, which commits the borrower to meeting social or environmental targets rather than – as with green, social or sustainable bonds – specifying the use of proceeds.
Given Covid-19… investors are very focused on the ‘S’ of the ESG equation
Cristina Lacaci, Morgan Stanley
Since the European Central Bank’s announcement in September that SLBs would be eligible as collateral for its asset purchase programme from January, many more corporates are said to be looking at the format – although bankers note that initially only bonds with environmental targets will be covered.
For investors, however, the inclusion of social themes in sustainable bonds or SLBs has been a selling point, according to Lacaci.
“Given Covid-19 and the events of the past six months, investors are very focused on the ‘S’ of the ESG equation,” she says. “When we’ve done sustainability bonds, the feedback from investors has been that they really appreciated that the issuer was thinking about this more holistically.”
Bankers also see scope for more overlap between green and social bonds. Barron notes that the green bond principles recommend issuers to ensure that projects covered do not have an adverse social impact.
“The broader objective remains to create a long-term sustainable net-zero or low-carbon world, and the social element is an important aspect,” she says.
Claquin agrees.
“We will likely see more convergence between green and social bonds, so green bonds will be structured to address the climate crisis but in a socially positive manner,” he says.
At the same time, many investors say that the label on an individual bond is less important than the issuer’s overall ESG strategy.
“For us, that is what’s critical,” says Rahman. “We assess each issuer on a holistic level on their overall ESG policies and climate change framework.
“Then when they come to market with a specific type of bond – whether SDG [the UN’s Sustainable Development Goal]-linked, social or green – we look at how the use of proceeds fits in with their overall framework, whether it is additive and whether it will help them transition to better outcomes.”
