Social bonds: Fools rush in where social angels fear to tread
Striking the right balance between risk and reward
Coronavirus has presented vast challenges for many industries, but sustainable finance appears to be booming.
Bonds issued by companies seeking to use the proceeds to counter the devastating effects of the pandemic are set to push ESG debt to a record high.
According to Dealogic, as at 30 October 2020, year-to-date issuance of green, social and sustainability bonds was $371bn which surpassed FY2019 issuance of $278bn.
Standout examples include Unédic, the French unemployment insurance agency, whose five social bonds worth a total of €16bn aimed to fund financial support and job retention schemes for workers.
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CADES, an administrative French state agency, has issued six Social Bonds recently also worth a total of €16bn.
These bonds, as well as the €1bn and €750m bonds issued by Italy's CDP, which supports sustainable development in Italy, all abided by the International Capital Market Association's (ICMA) Social Bond Principles.
ICMA's standards have been a successful self-regulating framework boosted the growth of the green, social and sustainability bond market.
Abiding by a simple set of voluntary rules enabled issuers to implement best practices and communicate valuable information to investors, such as transparency surrounding the type of projects to be funded and their expected impact.
But that has not been the case for every Covid-related bond issued and this is something would-be ethical investors need to be mindful of.
Beware the 'greenwashing' risk
While social bond issuance stood at $99.1bn, according to Dealogic, at the end of October, debt issuance related to the pandemic has vastly outpaced this (we estimate more than $125bn).
The difference in these numbers in part relates to whether the issuer has abided by the ICMA's guidelines, even though a good deal of social bonds haven't been directly linked to the pandemic.
The speed with which some organisations launched Covid response bonds, as the ESG industry is terming them, meant there was not time to implement the necessary frameworks required to meet ICMA's standards.
As such, ICMA published an updated handbook specifically providing guidance on such issuance, to help investors better understand what they were investing in.
While Covid response bond issuers are not necessarily engaging in greenwashing - the practice of calling something ethical when it is not - the difference between them and their social bond cousins raises an important issue for all ESG investors.
Check, check and check again
The appetite for sustainable finance had been growing before the pandemic and, if anything, Covid-19 has galvanised investor desire for it.
But as with any rapidly developing market, it is essential for investors to be able to spot - and for issuers to maintain - best practice.
Much of this relies on clear and concise disclosure by the issuer. It is important for companies to thoroughly outline how they will use the investment they have raised.
Furthermore, it is crucial for companies to publish detailed success criteria that can be easily measured and understood so that investors can see whether their money made the impact it was meant to make.
Firms in countries where ESG investing is a nascent industry are more likely to receive support from global investors if they adhere to high standards.
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