Since the outbreak of the coronavirus pandemic, the social bond market has exploded into life, with public sector borrowers eagerly seeking to finance economic and health expenditures.
The use of a social label on bonds to fund the response to the Covid-19 crisis could not be more apt. It is intrinsically a social cause.
Some public sector issuers have used their existing social bond frameworks that are tied to ICMA’s Social Bond Principles, such as the African Development Bank and the International Finance Corporation. Meanwhile, others have updated their frameworks to include support for the health sector, such as the Council of Europe Development Bank, which earlier this week sold its second Covid-19 social bond.
There have also been some novel approaches, with Bpifrance and the Nordic Investment Bank developing brand-new Covid-19 response bond frameworks — although it should be noted that the issuers do not see these as social bonds per se, as they do not meet all of the criteria of the SBPs. These bonds are targeted more towards short-term liquidity needs, rather than long-term social targets.
All these approaches have met incredible demand from investors, helping to push the issuance of socially labelled bonds to a record volume.
There have also been debut social bonds, including from Unédic, which raised €4bn in May — the biggest social bond ever issued. More new entrants are expected to come to the social bond market to fund their response to the crisis, including the European Stability Mechanism, which is developing a social bond framework to fund its pandemic crisis support package.
As more issuers pile into the social bond market, this will lead to a more mature investor base with more dedicated social bond funds and indices. This will drive more social bond issuance, which will in turn help develop the investor base further. That can only be a great thing for the social bond market — and, hopefully, society.
However, the picture is far less pretty in the green bond market, which has unfortunately ground to a near halt during the coronavirus crisis.
While social bond issuance was up 868% year-on-year in April, making it the strongest ever month for the asset class, green bond issuance was down 17% over the same period, according to data from UniCredit.
But it has not been for want of trying from issuers. Petra Wehlert, head of capital markets at KfW, one of the largest green bond issuers, told GlobalCapital recently that the premium for issuing green bonds over conventional bonds had narrowed, making them less attractive to issue. The agency has yet to issue a green bond in a core currency this year and has raised just €430m via green bonds, some way behind its target of €8bn.
Senior bankers say that there is evidence of some under-performance by green bonds, with investor attention having switched to social bonds.
But there shouldn’t be a shift at all from investors, not even a temporary one. A higher focus on social bonds is fine, but that doesn’t mean green bonds should be forgotten. After all, the climate crisis is just as present — and possibly even more of a threat to society than the coronavirus.
Investors need to continue to support the fight against the climate crisis. It’s not as if it is going to go away just because, temporarily, more people are working from home and fewer people are flying or driving.
The other option is for borrowers to stick it out and issue green bonds, albeit with a smaller ‘greenium’ than they have been used to. There may well be a bigger premium for social bonds, but green projects still need to be financed and issuers are still making at least some cost-saving here versus conventional bonds.
The coronavirus pandemic is definitely more tangible than the climate crisis. It’s having a physical, emotional and economic impact on everyone. But that’s not to say that the environmental problems we are facing are not just as real. The effects may be more gradual and subtle, at least for now, but that will not be the case if we ignore it.