Supported by Impax Asset Management
Until now, social bonds — fixed income instruments whose proceeds are earmarked for programs that bring social good, like low-income housing or healthcare — have mostly labored in the shadow of their more popular cousin, green bonds, which raise money to fight against climate change or mitigate its effects.
But that has changed in a major way this year, as governments and supernationals race to respond to the coronavirus pandemic by building medical equipment, researching potential vaccines, and offering assistance to people who have lost their jobs. All of that takes money — and investors and asset managers are proving happy to provide that funding, via newly issued social bonds.
The market for so-called Covid-19 bonds has exploded from zero to more than $65 billion in a matter of months. That figure is likely to surpass $100 billion by later this year, and experts say the growth is likely to lead to continued interest in social bonds of all stripes even after the pandemic is brought under control.
With Covid-19 bonds, “We’re looking for social bonds that are addressing immediate needs related to the pandemic across a wide range of areas, including the treatment of patients and supporting the healthcare industry in their response to the pandemic,” says Greg Hasevlat, sustainability research analyst at Impax Asset Management. A major goal of such bonds, he says, is “alleviating the burden of the crisis.”
The first Covid-19 bond came from Bank of China in February. Called a “Covid-19 impact alleviation social bond,” it was meant to help soften the blow of unemployment in China.
Since then, Covid-19 bonds have come from sovereign, supranational and agency issuers, and from a few corporates as well; issuers to date include the European Investment Bank, the International Finance Corp., the African Development Bank, and Pfizer. Some of the bonds proceeds were to be used for medical equipment or Covid-19 testing; others were aimed at broader economic issues, like supporting workers who lost their jobs to a lockdown, or to help keep companies from going out of business.
Total issuance surpassed $65 billion as of early May, and that figure is far from a final number. AXA Investment Management thinks that figure will surpass $100 billion by later this year.
Moody’s, meanwhile, expects the issuance of social and sustainability bonds — the latter being bonds that can be used for either an environmental or a social purpose, or both — to total a combined $100 billion this year. The category of sustainable bonds — the overarching grouping that includes green bonds, social bonds and sustainability bonds — could potentially hit $325 billion in new issues this year, Moody’s says.
What Covid-19 Bond Buyers Look For
Impax has bought two Covid-19 bonds for its portfolios so far. The process for assessing a Covid-19 bond for potential purchase is similar to what the manager uses when considering green bonds or other social bonds.
“In terms of assessment, we look at a combination of credit, structure and impact,” says Tony Trzcinka, portfolio manager on Impax’s Pax Core Bond Fund. For the bonds Impax has bought, it helps that the firm knows the issuers — Bank of America and the World Bank, respectively — quite well from past bond purchases. “We have a strong relationship with Bank of America and have provided feedback to them in the past on sustainability issues,” he says. “The World Bank is also an issuer that we have a strong and long-time relationship with.”
AXA-IM has bought €230 million ($255 million) worth of Covid-19 bonds as of early May. “We have developed an investment framework which expects transparency from issuers around how proceeds will be used to support their response to the pandemic,” the firm says. “We also call for a commitment to outcome and impact measurement.”
Bond buyers look at the issuer as well as the bond itself. “We still require Covid-19 bonds to be issued by entities with robust sustainability practices and ambitions,” AXA-IM says. “We also have expectations that issuers will be open and willing to engage investors in ongoing dialogue on sustainability practices – especially on public health and human capital issues – after the issuance. This way we can ensure that Covid-19 bonds are not only short-term opportunistic instruments, but also fit into the longer-term sustainability strategies of issuers.”
In terms of portfolio construction, Impax considers Covid-19 bonds to be “impact bonds” and accounts for them within the “impact” category of their portfolio. “We define impact by use-of-proceeds of a bond,” Trzcinka says. “If the use-of-proceeds goes to one of our impact focus areas, including critical environmental and social issues, then we consider it an ‘impact’ bond.”
There’s been plenty of interest from investors and asset owners — that is, clients of asset managers — in investing in Covid-19 bonds too. “We have seen a steady stream of inquiries from a range of investors and asset owners who are expressing a particular interest in strategies where we can offer higher impact,” Trzcinka says.
Social bonds and the UN’s SDGs
The coronavirus-inspired growth of social bonds has come as more and more institutional investors were already looking at sustainable bonds — both social and green — as a way to support the UN’s Sustainable Development Goals, or SDGs. The past few years has brought a flurry of bonds being issued whose proceeds were directly tied to projects aimed at meeting the SDGs, and investors have been actively looking to fund such projects.
Thanks to all the Covid-19 bonds coming to market, “We have seen a strong surge in the interest in social bonds lately,” says Nordea Bank sustainable bonds executive Anna Reuterskiöld. She expects this growth in interest in social bonds to continue even when the pandemic starts to be brought under control.
Among the recent institutional investments and searches for SDG-linked bonds, as tracked by CleantechIQ:
The California State Teachers’ Retirement System led more than 40 institutional investors buying pieces of a $500 million global benchmark bond from the IFC. Proceeds were earmarked toward women-owned enterprises and projects for low-income communities in emerging markets.
- Wespath Benefits & Investmentswas an anchor investor in the ORCA (Off-Grid, Renewable and Climate Action) Impact Note from Developing World Markets, which invested more than $60 million in businesses promoting renewable energy and climate solutions across Asia, Africa and Latin America.
- Stichting Pensioenfonds ABPset aside $68 billion for investment opportunities linked to 13 of the 17 SDGs, which included the purchase in 2018 of €360 million ($400 million) worth of green bonds issued by the Belgian government. Pension officials have said that its investments in green bonds are important to achieving its sustainability targets
- AP2 invested in a social bond issued by Dutch bank NWB, with the proceeds supporting lending for social housing. Safe and affordable housing is a key component of SDG #11. It also invested in the World Bank’s sustainable development bond focusing on gender equality, a component of SDG number 5.
- Luxembourg’s Fonds de Compensationinvested €100 million ($112 million) in Allianz Global Investors’ green bond fund and issued multiple mandates for SDG-related funds.
The Impact on Social Bonds
This all points to how the issuance, and acceptance, of Covid-19 bonds could lead to further development of social and sustainable bonds overall. “In our view, these bonds could also act to boost the growth of social and sustainability bond issuances,” says AXA-IM.
JP Morgan global market strategist Samantha Azzarello agrees. “Moving forward, it seems likely that this momentum continues,” she says. “Social and sustainability bonds are not only appropriate for providing emergency funding during the pandemic, but also after, as economies are rebuilding and structural changes are occurring.” That is likely to lead to the “further interest, adoption and use of social and sustainability bonds,” Azzarello adds.
Indeed, the growth of Covid-19 bonds will likely continue as the world struggles to shake off the virus. And it’s likely to mean increased acceptance of social bonds overall. “We do expect social bonds to continue to grow,” Impax’s Trzcinka says, likening it to the growth of gender-themed bonds. Impax worked with the World Bank last year to structure the first gender-themed social bond; since then, there have been several more such issuances, with more on the way. “We are encouraged by the growth and expect to see even more growth in both social and environmental use of proceeds because asset owners are asking for it.”