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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