Outsized growth in issuances and economic urgency across countries bolster case for ESG-linked debt
As sustainable investing gathers significant momentum, many long-time advocates argue that the time is ripe for ESG to take root in the fixed-income space – a natural growth area given its emphasis on risk mitigation. And by some indications, it seems social bonds will be the next frontier.
Citing data from Environmental Finance, S&P Global said in a recent note that the ESG debt market almost doubled from US$326 billion in 2019 to US$608.8 billion last year. Under that broad umbrella, social bonds used for projects such as constructing hospitals and schools saw a nine-fold jump to US$164.87 billion in 2020 from the previous year.
That strength could be maintained at least for the near-term: according to recent Moody’s data, global social bond issuance amounted to US$90 billion in the first quarter of 2021 alone. It reflects a burst of activity orders of magnitude above that seen over the previous decade, with a total of US$421 million in social impact bonds worldwide between 2010 and 2020, as estimated by the Brookings Institution.
“It would be difficult to sustain the enormous growth social bonds saw in 2020 over the long term, although issuance in the first quarter of 2021 was extremely brisk at more than 50% of 2020's total in just three months,” Meredith Jones, head of ESG at financial services firm Aon PLC, told S&P Global. “Demand remains high and we expect positive growth generally.”
Government spending has been one major driver of social bond issuance. Ayman Ahmed, senior fixed-income analyst at Thornburg Investment Management, emphasized the pressure countries have been under to provide economic stimulus amid the pandemic.
“With social spending on transfers, debt forgiveness, debt extension, and subsidies seen as a must for the population to navigate the crisis, issuers took advantage of market trends,” Ahmed said. In particular, he said the fact that such bonds come with a coupon that’s 15 basis points cheaper on average provide governments with some relief on debt service costs “when they most need it.”
Canada could be joining that trend soon. In documents written as part of the April 2021 budget, the Department of Finance underscored social bonds as a potential bridge between socially conscious investors and Government of Canada bonds to support social objectives. The department proposed to explore them as an opportunity to complement the government’s existing debt program as part of a slew of consultations to be held in the fall.
As much appetite as there is for social bond investment, many investors are cautious. Just as greenwashing is an issue for the environmentally focused, some issuers may put on a socially conscious front in an effort to catch the wave of social investment.