Social bond and sovereign green bond issuance surges

The coronavirus crisis has triggered some ESG rebalancing in the sustainable fixed income space in favour of social bonds, according to NN Investment Partners. In the past, green bonds have dominated, but the firm says that a heightened focus on the social implications of the pandemic has shifted the emphasis from E to S in the last couple of months, and led to an increase in bonds that raise funds for social projects. 

Since the beginning of April around EUR20 billion has been raised, predominantly in France, Spain, Italy, the Netherlands, Japan and Africa. In less than three months, the social bond market has grown by a staggering 43 per cent to EUR66 billion.

Proceeds from social bonds have mostly been used for social housing projects and job creation so far, but agencies and supranational organisations have recently been using them to help mitigate the severe direct and indirect social and economic impact of Covid-19. The proceeds of most of the so-called Covid-19 bonds are financing social projects related to healthcare and preservation of employment. 

The majority of the proceeds have been used to support micro, small and medium-sized enterprises (MSMEs), with a focus on the preservation of jobs. To fight Covid-19-related fluctuations in the French labour market, Unédic, the French unemployment insurance management body, launched on 15 May 2020 the largest social bond to date, worth EUR4 billion. In response to the challenges in the healthcare sector, other recently launched social bonds’ proceeds targeted medical supplies and equipment, rehabilitation, medical-related infrastructure, and R&D for medicines and vaccines. They also help provide financial support to businesses so they can retain staff and maintain employment levels, and to fund the repurposing of factories to produce essential equipment.

The main issuers are likely to continue to be agencies, supranational organisations and financial institutions. They make up 51 per cent, 16 per cent and 13 per cent of the social bond market respectively. Most of the social bonds are euro-denominated, with a few US dollar and Japanese yen issues.

Jovita Razauskaite, portfolio manager, Green Bond, NN Investment Partners, says: “The Covid-19 pandemic has clearly brought the social bond market to the next level. It is now in a phase very similar to that of the green bond market in 2013 and 2014. However, despite the recent growth surge, it is still comparatively small and dominated by a few participants. If the social bond market is to grow further and diversify, it will need to attract a broader range of participants and issuer types. As our green bond strategies run purely green portfolios, we do not hold social bonds.

“Once the pandemic is behind us, this market could continue to grow. Corporate issuers that wish to address fundamental social issues across their businesses and supply chains could increasingly seek financing via social bonds. As liquidity increases, social bonds will be a viable option for investors wishing to make a focused positive social impact. The biggest challenge for the social bond market will be creating a more standardised impact reporting format, which will improve transparency and enhance its credibility and growth potential. ”
Nevertheless, NN IP believes that in the long-term, green bonds will still lead the way in building a sustainable economic recovery and supporting the transition to a net-zero emission and climate-resilient world. The sovereign green bond market continues to grow, with several potential European sovereign candidates, including Germany, Italy, Spain, Sweden and Denmark, planning inaugural green bonds in 2020. In the past issuers have either tapped the market with bullet issues (France, Belgium) or chosen to build a yield curve by issuing green bonds with different maturities and coupons (Poland, Chile). Germany and Denmark are now looking at innovative new structures.

Germany is on track to issue its inaugural green bond (likely to be EUR10 billion) in August or September this year. After considering other options, the German government has indicated that it is planning to tap the market with a new twin green bond structure: issuing a green bond and a regular bond with the same maturity and coupon. This would provide a natural diversification between conventional and green bond investors. The ultimate plan is to build a full German green government curve.

Another potential new sovereign green bond structure has been put forward by Denmark. In the Danish concept, bonds are issued with transferable labels called green add-ons or certificates. This means an issue has two components designed as separated securities, each with its own ISIN. One is a conventional bond and the other is the certificate or add-on. The add-on is the part that contains the proof that the money is being used for green expenditure and/or green projects. The rationale behind this proposal is the small size of the Danish sovereign bond market and fears that having two types of sovereign bonds would create liquidity implications for the market as a whole.

Bram Bos, lead portfolio manager, Green Bond, NN Investment Partners, adds: “We are encouraged to see the continued growth of the sovereign green bond, both in terms of volume and the number of new issuers planning to tap this market. As in all areas of the market for sustainable finance, we are wary of issues that offer less transparency in terms of use of proceeds, or whose structures are likely to raise questions. The Danish example is a case in point, and we have strong reservations about this concept. We support structures where countries create a green yield curve (Germany) or use a bullet structure (France). Building a green yield curve offers bond options in a range of maturities and indicates a country’s firm commitment to a fully-fledged green bond market. Regularly tapping an existing single green bond issue improves liquidity in the quickly expanding green bond market. “