Corona pandemic drives record interest in social bonds

The fight against the impact of COVID-19 has brought social bonds into the spotlight, and Nordea’s Anna Reuterskiöld expects the trend to continue

Social bonds, which finance projects with a positive social impact, are experiencing a major upswing amid the coronavirus pandemic.

Investors have shown strong demand for a wave of recent social bond issuances from supranationals including the European Investment Bank (EIB), Nordic Investment Bank (NIB) and the World Bank (IFC). Nordea enjoys a prime overview, having been involved in much of the discussion as well as bond issuances, including the EIB issuance of a SEK 3 billion sustainability awareness bond to finance the fight against the COVID-19 pandemic.

Anna Reuterskiöld, Debt Capital Markets, Sustainable Bonds

Anna Reuterskiöld, Debt Capital Markets, Sustainable Bonds

Nordea’s Anna Reuterskiöld from Debt Capital Markets, Sustainable Bonds, expects that the rise of social bonds will only continue as businesses and the public sector try to navigate the economic consequences of the pandemic. She discussed the developments in a recent interview with Swedish financial publication Realtid (in Swedish).

“We have seen a strong surge in the interest in social bonds lately. In the Swedish bond market, social bonds now account for just over 30 percent of the total social, green and sustainable bonds issued recently. The corresponding global figure is around 20 percent, both constituting a dramatic increase compared to before the crisis,” Reuterskiöld tells Realtid.

“We see a clear investor interest in this type of bond, not least from many life insurance companies,” she adds.

Combating the current corona crisis

Reuterskiöld says the increased share of social bonds shows the market’s ability to focus on what’s currently the most pressing sustainability issue, while more long-term issues are getting slightly less attention at the moment. Green bonds retain their dominant position over social and sustainability bonds but haven’t been in the spotlight as much lately, as institutional capital is looking for financial instruments that can combat the current corona crisis.

“Green bonds will take centre stage again when the corona crisis ends,” says Reuterskiöld. “Right now, there is strong focus on fighting the coronavirus and saving the economy, but the more long-term environmental challenges will cause green bonds to regain the market shares they’re currently losing to social bonds,” she adds.

Unrest in the corporate bond market

The bond market saw an earlier liquidity shortage in March, which has also affected developments. In the Swedish market for green, social and sustainable bonds, for example, the primary market was completely silent from March 19-25.

“When the market opened up again, prices had moved. Social, green and sustainable bonds have also moved but seem to have fared slightly better than traditional bonds. Often when markets are disrupted and temporarily suspended, issuers such as the EIB are the first ones out of the gate when they open up again,” says Reuterskiöld.

In contrast to green bonds, social bonds almost always create value locally, which explains why interest is currently record high, she says.

“In these times of crisis, many institutional investors are focused on contributing to the communities in which they operate. They want to be able to show their stakeholders that they are trying to improve the situation,” she adds.

Sustainable vs. non-sustainable investments

Whether opting for social or green, investors and end consumers are increasingly choosing the actors that are sustainable over less sustainable investments.

“In the future, it will be less about the type of discount that a social, green or sustainable bond can give in the bond market and more about what extra premium less sustainable companies will have to pay, assuming investors welcome their bonds at all,” says Reuterskiöld.

“Ultimately, it’s all about supply and demand. At the same time as interest in green, social and sustainable bonds is on the rise, the appetite for non-sustainable products is generally falling. After the crisis, we will probably see that green, social and sustainable bonds outperform those that are less sustainable,” she adds.

Alongside the rise of social bonds, Reuterskiöld also sees greater interest in so-called “target-linked” bonds – bonds that specify fixed targets to be achieved, instead of what the proceeds are to be used for, as with classic green, social and sustainable bonds.

As investors become increasingly interested in understanding the environmental impact of their investments, many see a benefit in promoting the transition to a low-carbon economy through a broad range of companies. While some companies’ potential for positive environmental impact may be less obvious, it is important to encourage all companies to contribute in all the ways they can. And the social and environmental reasons for investing today are increasingly going hand in hand with the financials, she says.

 

Related content:

Find out more about how Nordea is helping public sector borrowers finance the COVID-19 response.

Even beyond COVID-19, issuers are increasingly looking to diversify their sustainable funding, and one way is through social bonds. Read more about how MuniFin, the largest provider of financing to Finnish municipalities, recently became the first Nordic SSA to publish a social bond framework, designed to fund projects related to housing, welfare and education.

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