While the spread of coronavirus disturbed financial markets this spring, there was a surge in social-bond issues in part to raise funds to deal with the crisis. These bonds can both provide emergency funding during the pandemic and address its aftermath.

Green bonds raise funds for environmentally-friendly projects while social bonds finance social projects such as healthcare and 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 and issuance was up 69 per cent in the first three months of 2020 compared with last year.

The International Finance Facility for Immunisation has been issuing ‘Vaccine bonds’ since 2006 to fund immunisation programmes, most recently in social-bond format. These allow IFFI to raise money today against pledges of future donations from ten governments, led by the UK, France, Italy, Austria and Spain.

‘Catastrophe bonds’ linked to pandemics have also been issued in past years by some European insurance groups. A qualifying pandemic results in their principal being written down.

In 2017 the World Bank issued two pandemic-linked catastrophe bonds totalling USD320 million. The criteria for triggering them – the size of the outbreak, its spread across borders, 12 weeks from WHO recognising the pandemic, and its exponential growth rate – were met by COVID-19 two months before the bonds’ scheduled maturity of July 2020.

Some USD6.7 billion of social bonds had been issued in response to COVID-19 by 9 April. These differ from catastrophe bonds by providing immediate funds to tackle the pandemic rather than waiting for a trigger event, and the principal is not written down: investors should still ultimately be repaid.

So far, only a minority of bonds issued in response to the pandemic are social bonds, but we consider them well-suited for raising funds to combat COVID-19. And some non-social bonds have been issued in formats resembling social bonds or which address the UN sustainable development goals and could be considered to be sustainable finance.

Issuers include the African Development Bank issuing a USD3 billion social bond for fighting the virus; a USD2 billion sustainable-development bond from the Inter-American Development Bank; a 1bn euro bond for Nordic countries; USD4.3 billion of bonds to fund Indonesia’s coronavirus relief; plus a 2.5bn euro bond to finance Austria’s COVID-19 response fund which received offers of 43bn euro.

In this year’s market volatility, the performance of green, social and sustainability bonds was driven by their sector and maturity exposure, but not by their greenness, suggesting they are no riskier than the overall market.

After rising in January, green-bond supply fell to be 7.4 per cent down over the quarter compared with last year, at USD45.4 billion. But social and sustainability bond issues kept rising, to leave the quarterly total up 69 per cent at USD25.4 billion including the coronavirus-related social bonds.

However the pandemic progresses, we do not think the underlying structural demand for green bonds will go away. As lockdowns end, governments and issuers may see green bonds as a way to meet environment goals and stimulate economic activity.

First published 15 April 2020.

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