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Social bonds popularity is surging amid crisis

Proceeds from social bonds are channelled to areas such as education, healthcare, housing and employment
posted onJune 24, 2020

The issuance of social bonds is growing as investors are now turning their attention to this asset class as a way of integrating social impact into their portfolios. S&P Global Ratings expects social bonds to emerge as the fastest-growing segment of the sustainable debt market this year, while Morgan Stanley says $32 billion dollars of social and sustainability bonds were issued in April 2020 alone.

Meanwhile, Moody's sees the issuance of green, social and sustainability bonds to rise 24% to $400 billion in 2020.

Social bonds are used to finance projects or assets that result in a positive social outcome. As per a Guardian article, the first social impact bond was announced in the UK on 18 March 2010 by then Justice Secretary Jack Straw, to finance a prisoner rehabilitation programme. 

The rising inequalities created by the coronavirus, prompt investors now to invest in  social bonds as a way to tackle matters such as housing, healthcare, employment and education post-pandemic. 

In March, the African Development Bank  (AFDB) launched a $3bn Fight Covid-19 social bond, which was the world’s largest dollar-denominated social bond transaction to date in capital markets according to the bank.

The Fight Covid-19 Social bond, with a three-year maturity, garnered interest from central banks and official institutions (53%), bank treasuries (27%), and asset managers (20%) including Socially Responsible Investors, with bids exceeding $4.6 billion, the bank said. 

Final bond distribution statistics were as follows: Europe (37%), Americas (36%), Asia (17%) Africa (8%,) and Middle-East (1%).  The Bank established its Social Bond framework in 2017 and raised the equivalent of  $2 billion through issuances denominated in Euro and Norwegian krone. 

Social bonds issuance rises

In January 2020, Ecuador issued a Sovereign Social Bond in the international market for $400 million, becoming the first country in the world to make this type of placement. 

Proceeds will provide access to affordable housing for more than 24,000 medium- or low-income families. It will also mobilise approximately $1.35 billion in investments in the country's housing sector. 

Guatemala, in April became the second Latin American to to tap the dollar social bond market this year. Proceeds from social bond will finance eligible social investments directly or indirectly related to Covid-19.

The rapid rise of social bond issuance has more than quadrupled so far this year, S&P Global Ratings said.

“And, while the recent surge may have been precipitated by COVID-19, the appeal of social bonds as a sustainable finance instrument may endure long after its effects have subsided” the agency added.

The Institute of International Finance also argues that social bond issuance is set to surge.  The Washington-based global association of the financial industry said that social bond markets could provide debt managers with a more diverse investor base as government deficits are set to sharply increase. 

As Covid-19 heralds a social bond boom, the International Capital Markets Association (ICMA) - which has published a social bond guide - , updated its Social Bond Principles (SBP) this month to include an expanded list of social project categories and target populations.