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Bonds 19 May 2020

Social bonds: their time to shine

Social bonds, as debt instruments that enable project financing with a positive social impact, have been gaining traction among issuers in recent years. In 2019, these kinds of issuances outpaced previous volume records, and issuance activity of this type will undoubtedly be driven by the COVID-19 pandemic in 2020. This is the view of analysts at BBVA Global Markets Research.

What are social bonds?

Since the expansion of the ESG (environment, social, and governance) bond market in recent years, social bonds have been a small but growing portion of the market. These bonds are used to finance projects or assets that result in a positive social outcome, such as loans to SMEs for employment generation in lower-income regions, loans to social housing projects, and financing the delivery of healthcare.

The development of the social bond principles in June 2016 by the International Capital Markets Association (ICMA) was a key turning point in the development of this segment of the ESG bond market, because they provide global guidelines and standards for social bond issuance.

Issuance of social bonds already reaching record levels in 2020

The issuance of green, social, and sustainable bonds has seen a year-on-year increase of 23 percent, with $84 billion in global issuances in the first four months of the year.

In previous years, social and sustainable bonds represented 20 percent of the total ESG issuance, driven both by investor demand and by the availability of eligible assets to be financed with these instruments. So far in 2020, this number has risen to 40 percent of total issuances, with social issuances representing 25 percent of this ESG bond total.

Issuers of social bonds have traditionally been from the finance or public sectors. In fact, the public sector is primarily responsible for this significant increase in activity, having issued $14 billion of the total $19 billion issued in 2020.

Coronavirus response brings these instruments more into focus

The extraordinary stimulus that has been introduced as a response to the spread of COVID-19 will require significant funding. It could be the time, with these extraordinary circumstances, for social bonds to come into their own.

Fifteen instruments labeled social and sustainable with some mention of a response to COVID-19 in their use of proceeds have already been issued, mainly by the IFC and other public sector bodies in Europe. The regional government of Madrid was the first Spanish entity to issue a social bond to fund coronavirus related projects with a €52 million private placement in April. BBVA acted as the sole advisory bank and bookrunner for the issuance.

Analysts at BBVA Global Markets Research expect that social bond issuances will continue to see increased volumes given that banks and public financing institutions, aiming to overcome the COVID-19 crisis, will continue to fund the stimulus and economic recovery programs that will be announced in the coming months.

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