Green bonds are about ‘building things’ – hard to do during lockdowns – while social bonds are about ‘doing things’, which makes social bonds ideal for responding to the coronavirus pandemic. Even so, by September, issues of green bonds during 2020 were ahead of the same period last year and as initial lockdowns ease, we expect more.
Green bonds raise funds for environmentally-friendly projects while social bonds finance projects such as healthcare that address specific social issues. Sustainability bonds fund a mix of green and social projects, so social and sustainability bonds can fund both healthcare and the broader economic pandemic response.
Issuance of social bonds between January and September was five-times as high as in 2019 at USD49.9 billion – far more than the USD17.2 billion issued in the whole of last year – while issuance of sustainability bonds rose 81 per cent by September at USD40.3 billion.
However, USD168 billion of green bonds were issued this year by September, exceeding the USD158 billion at the same stage of 2019 and heading towards last year’s total of USD230 billion. Europe accounted for 44 per cent of issues, emerging Asian countries 20 per cent and North America 19 per cent.
That took the overall market for green bonds to USD778 billion, of which 45 per cent is denominated in euros, 30 per cent in dollars and 12 per cent in Chinese renminbi.
Some of this growth is coming from sovereign countries. Germany has issued its first green bond, receiving EUR33 billion of orders for a USD6.5 billion 10-year bond. It also plans a 5-year issue of up to EUR4.5 billion this year to be followed by 2-year and 30-year bonds. Germany has identified EUR12.7 billion of eligible green spending in its 2019 federal budget, and although this is existing planned expenditure, green bonds bring stronger transparency and reporting to spending.
The overall market for social bonds reached USD91.9 billion by September with sustainability bonds totalling USD113 billion. Europe has issued most of these bonds and 55 per cent are denominated in euros against just 27 per cent in dollars.
But the European Council of Ministers agreed in July that 30 per cent of the EU’s EUR1,074 billion budget and the EUR750 billion post-pandemic recovery fund should be climate related, complying with targets to achieve climate neutrality by 2050.
As the EU is now authorised to borrow up to EUR750 billion on the capital markets by 2026, could it issue green bonds? Raising 30 per cent of that would dwarf all other green-bond issuers.
However, there are hurdles. First, EU green-bond standards and definitions are yet to come into force. Second, funds borrowed by the EU can be used only to address the consequences of COVID-19. And third, the funds will be spent by member states, requiring the EU to impose additional conditions on how they spend the money – after all, the whole point of green, social and sustainability bonds is knowing exactly what projects they fund.
But there are projects to be funded, particularly in countries with existing green-bond frameworks. The question is whether governments allocate those projects to their own green or social bonds, or prefer EU green or social bonds.
First published 11 September 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.
HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
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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 09 September 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 121 26 78 64
Neutral 212 45 100 47
Underweight 133 29 57 43
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 30 June 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 139 67 97 70
Sell 67 33 28 42
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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