A pandemic-era boom in debt backing social causes is already fading as other types of bonds jostle for supremacy in a fast-moving ethical market.
Governments that had propped up Covid-ravaged economies by issuing social bonds are now turning their attention to longer-term climate goals, while companies are keen for increased flexibility when spending proceeds from sales of environmental, social and governance (ESG) debt. That’s crimping the flow of social notes that typically fund specific projects such as job creation or affordable housing.
Sales of social bonds in Europe have plunged 60% so far this year to 10.9 billion euros ($12.3 billion) and it’s a similar picture in the U.S., according to data compiled by Bloomberg. By contrast, issuance of sustainability and sustainability-linked debt is booming, with volumes more than doubling to 16 billion euros from the same period a year ago.
It’s a global phenomenon that’s expected to continue. Moody’s ESG Solutions expects worldwide sales of social bonds to fall 25% this year to around $150 billion, even as it sees green bonds driving a record $1.35 trillion in overall ethical issuance.
“We are seeing a return of focus to green because some Covid-related spending has declined,” said Anne van Riel, the head of sustainable finance capital markets for the Americas at BNP Paribas SA, this year’s top underwriter of green bonds. “This year we expect companies, which have issued fewer social bonds, to incorporate social elements in sustainability bond issuance.”
The social bond market was ignited by the pandemic and from a push for equality in the wake of protests over #MeToo and the killing of George Floyd. At the height of its appeal in 2020, the European Union smashed bond market records with a 233 billion-euro orderbook for its first social sale to fund employment. In the U.S., Citigroup Inc. brought the largest-ever social bond deal from the private sector to fund affordable housing.
These deals were expected to prompt more of a follow-on impact, including in emerging markets. While issuance jumped last year in some nations, such as Chile and South Korea, Ghana postponed a planned $2 billion offering to fund budget programs from education to health. State agencies such as France’s CADES are still significant sellers, yet developed-nation governments so far have barely issued any social bonds.
“There’s a huge focus on environmental with climate change, and net zero and green bonds, etc. But, you know, there’s not really the focus on the S of ESG,” said David Zahn, head of sustainable fixed income at Franklin Templeton.
Lack of Projects
A lack of viable specific projects on which to use social bond funding has proved a key stumbling block for the market’s development. It’s difficult for some companies to create enough projects targeting minority groups to issue a pure social bond at a benchmark size, said BNP’s van Riel.
It’s also harder to do social bond frameworks and there is “even less consistency on key performance indicators and disclosure,” said Scott Freedman, a fund manager at Newton Investment Management, which oversees 105.4 billion pounds ($143 billion) of assets including ESG debt.
With firms’ ESG ambitions still a hot topic in 2022, the focus appears to be skewed more on the ‘E’ and ‘G’ parts, from cutting emissions to promoting women in management. Moody’s forecasts a steady increase in sustainability debt, which can fund both green and social projects, as borrowers start to think more holistically, said Matthew Kuchtyak, vice president of ESG outreach and research at Moody’s ESG Solutions.
“Social is here to stay as a point of importance,” Kuchtyak said in an interview. “It’s just that the dedicated social bond label is likely to see a modest decline in volumes this year.”
Issuance so far this year is supporting that view, amid an upturn in sales of sustainability-linked bonds, where borrowing costs are dependent on organization-wide ethical targets. Green bonds are also enjoying a revival, with year-to-date sales jumping 46% in Europe, and forecasts for exponential growth in the coming years.
“The issuer, and in my mind rightfully so, has thought about the fact that if they’re going to create a framework, let’s create one that’s going to be longer lasting, and give the flexibility to issue either green or social, based upon what they are seeing as an opportunity,” said Stephen Liberatore, head of ESG and Impact for Global Fixed Income at investment management firm Nuveen.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Ronan Martin, Caleb Mutua
