The coronavirus pandemic is shaping the market for green, social and sustainability bonds. All these instruments finance environmentally- or socially-friendly projects, but while issuance of green bonds fell in the first half of 2020, issuance of social and sustainability bonds has soared.
This is partly because social-bond issuance, and to a lesser extent sustainability-bond issuance, has been rising from a low base. But it’s also because if green bonds are about ‘building things’ – which is difficult during a pandemic and the associated lockdowns – then social bonds are about ‘doing things’. That makes social bonds ideally suited to responding to the COVID-19 pandemic.
Green bonds raise funds for environmentally-friendly projects while social bonds finance projects such as healthcare which address or mitigate a specific social issue or seek to achieve positive social outcomes, especially for a target population. Sustainability bonds fund a mix of green and social projects.
Social and sustainability bonds can thus fund both healthcare and the broader economic response to COVID-19.
Although green-bond issuance is down by 12 per cent in the first half of 2020 compared with January-June 2019, the gap has been filled by a 347 per cent increase in social-bond issuance and a 96 per cent rise in issuance of sustainability bonds.
In the year to late June, the issuance of social and sustainability bonds was USD89.1 billion, almost catching up with green-bond issuance at USD96.3 billion. Collectively, green, social and sustainability bond issuance rose by 29 per cent .
We estimate that a further USD119 billion of bonds have been issued in response to COVID-19 even though they are not designated green, social or sustainability bonds.
Some are structured like social bonds but lack the formal label; some are sustainable-development bonds that target one or more of the United Nations’ Sustainable Development Goals. These are favoured by development banks but, unlike social bonds, their proceeds are not earmarked against specific projects because these banks regard all of their activities as sustainable.
In June, the principles influencing social bonds have been updated to include new examples of eligible projects and target populations. These now include programmes designed to prevent or alleviate unemployment stemming from socio-economic crises, sustainable food systems, and integration into the market and society, including reducing income inequality. Women and sexual or gender minorities, plus ageing populations and vulnerable youths, are now also included as target populations.
This expansion of project examples and target populations should increase the attractiveness to issuers of social bonds while maintaining the ‘use of proceeds’ format and the reporting requirements.
First published 26 June 2020.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Dominic Kini
Fixed income: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to four months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which, in the case of credit research, may differ from our long-term opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; HSBC has assigned a fundamental recommendation structure, as described below, only for its longer-term investment opportunities.
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Definitions for fundamental credit and covered bond recommendations Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Definitions for trades (Rates & Credit)
Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap ("swaption"), interest rate cap or floor, inflation cap or floor, or Total Return Swap ("TRS"). The buyer/seller of a TRS receives/pays the total return of the underlying instrument or index at the end of the period and pays/receives the funding leg. Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying the reference entity's credit risk.
Pay and receive refer to a trade call to pay or receive the fixed leg of an interest rate swap (IRS), a non-deliverable IRS, the firstnamed leg of a basis swap, the realised inflation leg of an inflation swap, or a forward rate agreement (FRA). An investor that executes a pay or receive trade is said to be "paid" or "received."
Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter a received position in an interest rate or inflation swap.
ASW (also asset-swap, Buy on asset swap, Buy on an asset-swapped basis): Buy a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations
As of 24 June 2020, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 122 27 78 64
Neutral 205 45 94 46
Underweight 130 28 52 40
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and Underweight = Sell. For rating definitions under both models, please see "Definitions for fundamental credit and covered bond recommendations" above.
Distribution of trades
As of 31 March 2020, the distribution of all trades published by HSBC is as follows:
All Covered instruments Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Buy 109 71 82 75
Sell 44 29 31 70
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap, and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see "Definitions for trades (Rates and Credit)" above.
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