Social distancing has been a key part of the global response to COVID-19 everywhere but debt capital markets, where social funding outcomes have come to the fore. As with most green, social and sustainability (GSS) bond developments, supranational, sovereign and agency (SSA) borrowers are leading the evolution of social issuance.
Matt Zaunmayr Deputy Editor KANGANEWS
SSA lending is often targeted at economic and social development, which gives most issuers in the sector a natural alignment between assets and GSS labelled funding. Until 2020, green bonds had been the preferred format and had far larger issuance volume. This was primarily the product of the relative ease of measuring environmental outcomes – for instance in volume of CO2 emissions abated – compared with the less readily quantifiable social sphere.
Frameworks to allow the proliferation of social-themed issuance have come just in time to facilitate the SSA sector’s pandemic response. COVID-19 has also increased the visibility of and engagement with social finance on the investor side as social-infrastructure requirements and concerns – such as access to healthcare, sanitation, education and employment – have become a central focus.
In recent years, development has been stymied by difficulty in identifying eligible assets, homogenising reporting criteria and tangibly displaying benefit. However, the challenges of the pandemic in developed and developing countries have highlighted the importance of spending on health infrastructure and social welfare. As a result, global social-bond volume in H1 2020 was up 351 per cent on H1 2019, according to S&P Global Ratings data.
“The EU taxonomy is an enabling framework. It allows issuers to be entrepreneurial with the activities they consider to be eligible for allocation from bonds. Issuers can decide which aspects of the taxonomy work for them – as long as what they include is identifiable and comparable, and the impact is clear.”
The development of frameworks is critical in the social space precisely because of the challenges involved in quantifying the impact of social projects. In late March, International Capital Market Association determined that existing guidance under the Social Bond Principles and Sustainability Bond Guidelines would apply to actions being taken to address the COVID-19 pandemic.
This means issuers have not needed to amend documentation before including pandemic-response measures in their social- and sustainability-bond asset pools. The EU’s taxonomy – which entered into force on 12 July and is designed to provide clarity on sustainable issuance and investments – also provides overarching guidance for issuers.
Aldo Romani, head of sustainability funding at European Investment Bank (EIB) in Luxembourg, tells KangaNews increased issuance of bonds linked to social targets is at least as much a reflection of structural developments over several years as it is the near-term impact of COVID-19.
“The EU taxonomy is an enabling framework. It allows issuers to be entrepreneurial with the activities they consider to be eligible for allocation from bonds. Issuers can decide which aspects of the taxonomy work for them – as long as what they include is identifiable and comparable, and the impact is clear,” Romani explains.
Some SSAs actually have greater capacity on the asset side to issue social bonds than green-themed product, making the expansion of this market a welcome development. One such issuer is NRW.BANK. Even so, Frank Richter, its Düsseldorf-based head of investor relations, tells KangaNews the agency decided against issuing a specific COVID-19 bond because it wants to have a clear focus on the long term rather than stressing specific subthemes. NRW.BANK executed a debut social-bond deal in the euro market at the end of June.
The EU criteria are stringent but they allow issuers to be flexible with what they include as eligible assets. The goal is to allow funders to continue to meet societal demands while maintaining the integrity of their issuance programmes.
This is crucial in times such as a pandemic. Somewhat presciently, EIB extended the eligibility criteria of its Sustainability Awareness Bond (SAB) programme at the end of 2019 to include outcomes related to the UN Sustainable Development Goal (SDG) 3, target 3.8 – universal access to affordable healthcare.
When COVID-19 hit and hospitals in Italy and elsewhere in the EU were found wanting for resources, EIB was a key supporter of investment for solutions. This investment would not previously have met SAB criteria because countries like Italy score too highly in the World Health Organisation’s universal health coverage index, which EIB uses as an indicator.
Using the taxonomy, however, EIB has further extended its SAB-eligible projects to include its contributions to SDG 3, target 3.D – health emergencies response and preparedness capacity. Romani says this coherently and transparently expanded the pool of eligible assets for the SAB programme, and disbursements are ongoing. “Our approach is open-ended and allows for adaptation. But clarity on outcomes, identification and reporting is key in all cases,” Romani comments.
Investors around the world appear keen to support social issuance. International Finance Corporation (IFC)’s Singapore-based head of funding, Asia Pacific, Marcin Bill, says: “Demand for social bonds has intensified. For instance, the 2035 maturity social bond IFC issued in Australian dollars in April – and has tapped multiple times subsequently – consistently prices well inside where a vanilla bond of the same maturity would land.”
In March, IFC also issued a US$1 billion social bond to address COVID-19. Meanwhile, World Bank executed a US$8 billion Sustainable Development Bond in April, with outcomes linked to its COVID-19 response. The transaction enjoyed participation by more than 300 investors around the world.
SSAs have taken different approaches in response to the circumstances of 2020. Where some have wrapped pandemic elements into their wider GSS issuance programmes – increasing the social component in the process – others have specifically highlighted their pandemic response by issuing COVID-19-themed bonds.
World Bank plans to continue issuing “COVID response” bonds. Andrea Dore, head of funding at World Bank in Washington, says the bonds qualify under World Bank’s Sustainable Development Bond framework. “World Bank Group is supporting projects in more than a hundred countries since the beginning of the pandemic. Investors are keen to understand what we are funding and to support these activities,” she explains.
Issuers have tried to respond to demand for COVID-19-themed issuance to have its own standards. Nordic Investment Bank (NIB) has issued two COVID-19 response bonds with its own framework applying to them. Proceeds from NIB COVID-19 response bonds will be allocated only to certain types of public-sector, financial-sector and real-economy lending. The latter includes lending to companies in the medical-equipment and healthcare sectors that are facing increased demand.
Jens Hellerup, head of funding and investor relations at NIB in Helsinki, says: “The investor community has welcomed our response-bond framework and the bonds issued under it. Both our response-bond transactions received very strong books.”
The proliferation of instruments and frameworks has always been a potential inhibitor for investment in GSS bonds, given the difficulty of comparing what each is trying to achieve.
This is a key part of what the EU taxonomy and similar – albeit generally less progressed – global initiatives are attempting to achieve. If bonds are issued and reported according to harmonised standards, investors should be able to compare transactions and frameworks, and more easily assess what issuers are attempting to achieve. The wording of a label given to each bond or programme is less important than its governing principles.
The COVID-19-induced uptick in social- and sustainability-bond issuance is the beginning of a new phase rather than a mature end point. There will certainly be no shortage of projects being financed that could be considered for allocation, particularly given the consequences of the COVID-19 pandemic are likely to have a long tail.
The fact that no measures to combat the COVID-19 crisis, like those being taken to combat the climate crisis, can be viewed in isolation should be kept in focus, says Romani. In addition to expanding its SAB-eligible assets, EIB has also broadened its Climate Awareness Bond pool of eligible activities to include more projects in line with the EU taxonomy.
In addition, Romani says EIB is looking at how it could structure criteria for projects that intersect the climate and COVID-19 crises, such as in biodiversity. The key, he says, is to use the frameworks provided by the EU taxonomy to ensure that any additions to existing eligibility is systematic. By doing this, he says, investors and issuers will be able to make better comparisons and decisions even as the amount of eligible asset classes in GSS bond transactions continues to expand.
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