The rise of social and sustainable bonds
Since the beginning of the pandemic social bonds and sustainable bonds have developed, to the detriment of the hitherto popular green bonds.
As the Covid-19 pandemic rocked world markets, some types of bonds suddenly found themselves in the spotlight, as was the case with social bonds and sustainability bonds, which was the product of governments racing to confront the financial fallout of last spring’s lockdowns.
As a reminder, while social bonds finance only projects having positive social results, sustainability bonds finance both social projects and green projects. These issues come both within the scope of a broader global movement for more responsible and sustainable financing. "The surge in social bonds has been strongly motivated by the pandemic, but it has also increased awareness of social performance among investors and issuers in general," says Maia Godemer, research analyst for green and sustainable finance at BloombergNEF and co-author of a report on the subject.
According to the BloombergNEF report, social bond issues worldwide amounted to $41.9 billion in the first half of the year, a jump of 376% compared to the same period in 2019, thanks to massive issues by several issuers such as Unédic Asseo, the French unemployment insurance management body, the Republic of Korea and the African Development Bank. Social bonds were “the perfect financial response to the economic and social shock,” writes Maie Godemer in this report. Issuers and investors have turned away from the very popular green bonds in favor of social bonds, which are better suited to the circumstances of the crisis and better able to deal with the economic and social fall out of the pandemic. Sales of green bonds fell by 8% to $199.6 billion during the same period, according to the BloombergNEF report.
After green-washing, social-washing?
In recent years, issuers have preferred green bonds to social bonds because their impact was quantifiable (energy consumption or greenhouse gas emissions, in particular), more transparent and subject to strict criteria. The risk of green-washing, therefore, remained limited. On the other hand, the case of social bonds is more delicate. Firstly, the term “social bond” currently has no legal definition, and the evaluation of social repercussions remains in the realm of the speculative. The risk of “social-washing” is therefore significant for issuers who would be tempted to qualify the proceeds of the issue as “social” when the social benefits obtained are questionable at best.
“The term ‘social bond’ actually has no legal definition, and the evaluation of social repercussions remains in the realm of the speculative”
Social bonds and sustainable fonds, like green bonds, are governed by the principles of the International Capital Market Association (ICMA) and evaluated on the basis of four essential elements: the use of the funds, the process of evaluation and selection of projects, fund management and reporting. Faced with a wave of social obligations, and to counter the risk of social-washing, ICMA published in March new guidelines and a question-and-answer document dealing with social and sustainable obligations in the context of the Covid-19 crisis, and then updated its principles on social obligations, in June 2020, to include an expanded list of social project categories and target populations. According to the association: “Eligible social projects may include, for example, Covid-19 related expenditure to increase the capacity and efficiency of the provision of healthcare services and equipment, medical research, loans to SMEs that support job creation in affected small businesses, and projects specifically designed to prevent and/or mitigate unemployment resulting from the pandemic.” However, these guidelines are not binding on issuers.
Pandemic bonds more than social bonds?
According to an analysis by ING, published last July, not all of the €237 billion “pandemic bonds” issued in the first six months of 2020 fall into the category of so-called social or sustainable bonds. In fact, only about 15% of these bonds have a social or sustainable framework, whereas for green bonds, 80% to 90% of the issues comply with the principals of green bonds. Opportunism or the impatience of issuers who enter the bond market at the expense of recommended audits? It is difficult to identify the origin of this phenomenon. Of course, the pandemic has created the impetus for issuers to finance themselves in the bond markets granted to them by social bonds, generally at a low cost.
One can only hope that, as the appetite for social and sustainable bonds continues, the governance and reporting practices recommended by ICMA will increasingly become the norm, if only to meet the market’s demands for transparency. As the rating agency S&P Global predicts): “Even in the current tumultuous economic environment, we expect social bond issuance to continue as companies become more sensitive to various social issues and seek to mitigate their exposure.”
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