During 2020 there was a rapid growth in ‘social bonds', but what is a social bond, and why has there been this surge in popularity? Bertrand Rocher explains
A social bond is a bond where the proceeds are dedicated to funding projects with a social impact; for example, improving the living conditions of certain sections of the population, through social housing. While it is a niche market, it met with tremendous success in 2020 due to a combination of different factors.
First, the unceasing development of the green bond market over recent years. This spectacular trend has demonstrated how powerful it can be for investors to hold bonds which offer transparency on the projects and assets their money is really invested in. We believe that the sudden surge in interest for social bonds has been a "collateral benefit" from the success of green bonds.
The EU Green Bond Standard is a positive step, as it should result in a more disciplined market, provided that it does not stifle the innovation that has been a critical part of green bonds' success."
Next and paradoxically, another area worth highlighting is the covid-19 crisis. The lockdowns and curfews and their impact on global activity has, to some extent, shown to a growing number of market participants that neglecting social issues could have a collective cost, possibly imperilling the whole economy.
Investing in reinforcing our societies therefore sounds all the more logical, especially at a time when public authorities are preparing themselves for the economic turmoil caused by the pandemic. This is why the EU issued its first social bonds in the fourth quarter of 2020, under the SURE (Support to mitigate Unemployment Rate in an Emergency) programme, which should reach a total of €100bn.
Green, social and sustainable bonds together amounted to approximately $1400bn as at the end of 2020 (excluding Fannie Mae issues) and we believe the growth in this market will spill over into 2021, with at least a record $600bn in new issuances of such instruments.
A significant chunk of this supply will come from governments or the EU: at the time of writing, the UK and Italy are preparing to issue their first green bonds, and Spain looks increasingly interested in taking the plunge in the coming months. This list is far from exhaustive as further countries plan to issue their first green bonds; whether takes place in 2021 or after is the question
The EU Green Bond Standard is due to be announced in the coming months and we believe there is a growing need to preserve the integrity of the green bond market. The financial success of green bonds is likely to attract newcomers with more opportunistic tendencies than those truly dedicated to contributing to the environmental transition.
The EU Green Bond Standard is a positive step, as it should result in a more disciplined market, provided that it does not stifle the innovation that has been a critical part of green bonds' success thus far.
Overall, the Standard is not a revolution per se: it is based upon the Green Bond Principles, best market practices and the new taxonomy. We welcome, in addition, the stricter procedure to accredit the third parties which deliver external reviews. The key point here is the link to the taxonomy, reinforcing the quality of the information each green bond framework delivers to investors.
At this stage, it is far too early to call for a similar initiative for social bonds: they are still a nascent, albeit rapidly-growing market, and the authorities cannot take the risk of slowing down this expansion at such a crucial phase of development. In any case, before establishing such a Social Bond Standard, the EU would have to articulate a ‘social taxonomy': the question is on the agenda of the EU Commission, which should look at the opportunity to extend the scope of the taxonomy to social objectives by the end of 2021.
Bertrand Rocher is portfolio manager and senior credit analyst at Mirova
