The COVID-19 crisis has driven greater awareness about social and sustainability bonds, which have been confirmed as timely and adequate financial instruments in the face of the new challenges ushered in by the global pandemic. Ángel Tejada, BBVA’s head of green and sustainable bonds uses this op-ed piece to analyze their performance and the outlook for this market.
The global COVID-19 pandemic is impacting every aspect of our lives, and in very different ways. It is also impacting businesses, their employees, their customers, and the communities they serve. The global crisis is testing the ability of organizations to react when faced with adversity as well as how capable they are at minimizing potential damage caused to stakeholders. In view of this situation and the new challenges resulting from the pandemic, organizations must look for different levers that will position them to be part of the solution.
Against this backdrop and in the face of these new challenges, green and social bonds are proving to be timely and adequate financial instruments. By the end of July, the global market for this kind of ESG bond reached a total issued volume of €170 billion, representing growth of more than 50 percent compared to the €110 billion total from the same period the year before.
Social and sustainability bonds issuances have risen almost 400 percent compared to 2019
Logically, this growth has been bolstered primarily by a surge in social bonds. Social and sustainability bonds issuances have risen almost 400 percent compared to 2019 and already represent 50 percent of the total amount issued in the ESG bond market (in 2019 it represented approximately 20 percent of the market). This instrument raises funding to finance projects that will have a positive impact on social development, and after the outbreak of the coronavirus pandemic, it will be a fundamental driver in responding to the devastating effects of the the virus. These instruments will contribute to the economic recovery of many sectors and will emphasize socially focused measures targeting specific segments of the population.
The suitability of this instrument to the current global situation combined with the support and commitment of the investor community has been decisive in the growth of social and sustainability bond issuances. There is clear demand from large fund managers and investment firms. Public support for social bonds stems from a pursuit of the additional positive impacts that these instruments promise, compared to a pure risk-adjusted return. We should be optimistic about the positive impact that green and social bonds will have on the social and economic recovery. Public sector issuers now have a specific instrument that fosters transparency in how funding is used for essential projects while also providing the investment community with an analysis of the activities that they are supporting through their investments.
Let's work for a green and social recovery, a transformation that will accommodate a new world
The market players — businesses, financial institutions, public sector issuers, investors, and regulators — have undoubtedly agreed that a post-pandemic comeback will be better, faster, and stronger, if environmental and social factors are taken into account in each of the measures and agreements that are adopted. Let's work for a green and social recovery, a transformation that will accommodate a new world with requirements for different patterns of production and consumption and a different way of acting in general.
Since 2014, green and social bonds have provided the capital markets with an alternative to traditional debt instruments. The market seeks to mobilize resources aligned with the global agenda and for the sake of sustainability, and it has been growing considerably each year: there were some months last year when it reach almost 10 percent of the volume of debt issued in fixed income markets. Although still a modest instrument in the market (it represents approximately one percent of global outstanding debt), the outlook is encouraging; its importance in the market is expected to gradually grow with the support of issuers, investors, governments, and regulators. Our Global Markets Research team estimates that by the end of 2020, the green and social bond market will have grown ten percent compared to its record performance in 2019, surpassing a $280 billion issuance total. Moving forward steadily and without hesitation.
During these times of uncertainty, it is worthwhile recognizing that the issuers — financial and non-financial companies and public issuers — are those who will later be responsible for the environmentally friendly and socially positive projects. These are the issuers who, supported by their underlying values and strategic priorities, have decided to focus on sustainability as a fundamental long-term strategy, expecting to receive positive impacts and competitive advantages. We can comfortably say that in today's world one of these competitive advantages lays in access to financing; green and social bonds represent an opportunity for issuers with a focus on sustainability, a focus on the transformation that is needed to address the new challenges of the future.
This is a strategic priority for BBVA. The bank’s contribution to the development of this market has been invaluable, both in Spain and in Europe, and we are confident in our vision that other regions that have been less active due to different circumstances will now also become important geographic areas where social and green bonds will be increasingly popular. The United States, Mexico, and almost every country in Latin America can already boast important examples. BBVA is an important advocate, supporting its clients through this digital and sustainable transformation.