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Covid fuels social bond surge in Asia

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By Morgan Davis
17 Sep 2020

Chinese issuers opened the Covid-19-linked bond market this year, tapping the capital markets to raise funds for relief from the health and economic effects of the virus. More deals have since popped up both in Asia and the world, and experts say the pandemic will change the way issuers and investors think about social bonds in future.

Bank of China sold the first international Covid-linked social bond in February, after domestic issuance in the Mainland markets by various borrowers. Investors bought in, hoping to stimulate the economy, provide support to those most affected by the pandemic and fund the production and distribution of personal protective equipment. 

BOC’s bonds carried a social label, putting them in line with international standards for socially responsible bond issuance — and making the transaction the first international social bond from China.

On September 17, experts joined GlobalCapital’s Sustainable and Responsible Capital Markets forum, held virtually, to discuss how Covid-19 has changed the social bond market in Asia in the months since.

“Covid is to social bonds as climate change is to green bonds,” said Jason Mortimer, head of sustainable investment, fixed income, at Nomura Asset Management in Tokyo. “The Covid crisis has dovetailed with issues that Japan and others are dealing with…Out of the crisis, something positive has come.”

Japanese borrowers started applying the Covid and social labels to bond sales this year, including for a planned retail bond sale. In Japan, the proceeds are being applied to social projects in new ways, for instance building infrastructure as people work from home or are isolated in socially distant areas.

The Beijing-based Asian Infrastructure Investment Bank has taken a similarly broad approach to Covid-19 relief.

As an infrastructure bank, AIIB’s work may not seem a ready fit for funding related to a health crisis. But when the multilateral development bank approached its inaugural Panda bond sale in June, it wanted to reflect the pandemic in its use of proceeds, said Martine Mills Hagen, head of funding at AIIB.

As a result, the renminbi trade carried a Combatting Covid-19 label. Since March, AIIB has funnelled some $6bn of financing to its members facing the negative impacts of the pandemic, and more is to come - as are more bond issues.

While Covid bonds can be a subset of social bonds, not all such transactions are considered social, nor do they fall in line with international standards.

Not every issuer has time to put a sustainability framework in place, meaning many may opt to sell Covid-linked bonds without marketing the transaction as social, said Jing Wen, head of sustainable financing at China Construction Bank. She said it was important not to underestimate the urgency that the pandemic had created, and the need for capital market support to come quickly.

The need for Covid-linked bonds has thrown light on the lack of funding for social projects in Asia in general.

With Covid-labelled social bonds, issuers and investors have been able to see tangible examples of how social bond proceeds can be put to use — something that may have seemed unclear before. “The Covid-19 pandemic showed the urgency that we need to pay attention to social concepts,” said Wen.

The gaps in the world’s systems are apparent, from lack of access to healthcare to the fragility of supply chains.

“The damage [of Covid] is broad and deep,” said Mortimer. Private funds are needed to foster resilience and the capital markets will play a key role in that. “[Covid-19] really raised awareness in the ESG investment world — it’s not just about climate change and green,” he said.

Because of the widespread impact of Covid-19, attention is on related capital market activity in a way like never before.

Almost every person is feeling the impact of the virus, be it through illness, isolation or working from home, creating the impetus for everyone to look at the underlying social issues, added Christina Ongoma, principal investment officer, upstream lead, financial institutions group for Asia Pacific at the International Finance Corp.

“The Covid crisis has brought a lot of opportunities and allowed us to think more creatively,” said Ongoma of virus-linked fundraising. “It’s not only the pandemic. It’s ‘are there dislocations in the market?’”

The panellists agreed that the need for Covid-related funding would go on for some time, as the world’s economies fight to come back from the pandemic. AIIB’s Covid crisis recovery facility, which has earmarked relief funds for AIIB members, will expire in October 2021, but Mills Hagen said infrastructure development would be essential for recovery long after that.

By Morgan Davis
17 Sep 2020