Asiapac social bonds closing in on US$10b; robust growth seen for 2021

Singapore

THE urgent need to fund Asia's prolonged fight against the pandemic has spilled over into the region's capital markets, via the issuance of social bonds that has more than tripled since the onset of Covid-19.

This growth momentum is expected to prevail in 2021 as long-term impacts of the crisis play out in Asia, said analysts.

Social bonds are sustainable securities issued to fund projects with positive social benefits, such as improving food security or financing hospital expansions. The Industrial Bank of Korea, for example, in June issued US$500 million in five-year social bonds with proceeds used to support virus-hit small businesses.

In Asia-Pacific's GSS (green, social and sustainability) bond market, social bonds have grown from a low 5 per cent of the total mix in 2019 to nearly 30 per cent year to date, latest data from BNP Paribas showed.

Year to date, social bond volumes in the region soared to US$9.8 billion - from US$3.2 billion a year ago - to outpace the growth of green bonds. To be clear, these numbers only include bonds that are in line with the International Capital Market Association's (ICMA) Social Bond Principles.

"Covid-19 has affected all sectors of the economy and has motivated all players to respond accordingly," Chaoni Huang, head of sustainable capital markets at BNP Paribas in Asia-Pacific, told The Business Times (BT).

"Both SSA (sovereigns, supranationals and agencies) and private institutions have quickly realised that social bonds are effective instruments to address socio-economic crises," she said.

South Korea is the largest social bond issuer in Asia, with about US$6.5 billion in issuances year to date, with Japan trailing at around US$1.7 billion.

In a 2021 outlook report, MSCI noted that investors will venture into financing vehicles like social bonds to address a challenge that "extends beyond the neat boundaries" of individual companies. "As long as the root causes remain, the inequalities and the risks remain too. We see investors waking up to that reality and beginning to shake things up."

China EXIM and China Development Bank have respectively issued seven billion yuan (S$1.4 billion) and 13.5 billion yuan in "virus control" bonds in 2020, with proceeds used to help contain the spread of Covid-19.

Both issuances were more than 10 times oversubscribed, a "clear indication" that investors believe the bonds will deliver a genuinely positive social impact, said Ms Huang.

Given the nature of social projects needed in Asia, combined with its many vulnerable communities, social bonds can yield many benefits for developing nations in the region, said Edris Boey, ESG practice lead at Maitri Asset Management.

Pre-pandemic, the five key developing Asean markets needed about US$1.3 trillion in investments to achieve just three of 17 UN Sustainable Development Goals, with a shortfall of US$537 billion. This financing gap is expected to increase with the global recession, added Ms Boey.

The World Bank estimates that as many as 38 million people in East Asian and Pacific countries could fall below the poverty line in 2020.

Considering the gravity of Asia's social development needs, social bonds should be increasingly explored as an alternative source of funding to government and international aid, said Ms Boey.

Globally, the Asian Development Bank is the second largest issuer of social bonds behind France this year, which marks a promising step.

While South Korea and Japan will likely continue to dominate Asia's social bond space, data inconsistency remains a key hurdle to growth.

In general, measuring the social benefits of a financing instrument can be problematic, said Bertrand Jabouley, sustainable finance analyst at S&P Global Ratings.

Key questions include the definition of target populations and the tracking and quantification of social benefits. Social challenges also differ between countries, making it difficult to achieve standardised bond offerings, Mr Jabouley told BT. He further said the assessment of social impacts tends to be more qualitative and less standardised than for green impacts.

For social bond issuances to continue, issuers and their banks must ensure that deals are transparent, said Elizabeth Allen, head of credit research for Asia-Pacific at HSBC Global Asset Management.

Issuer-based analysis is crucial to determine the appropriateness of a social bond for investors who, at the same time, need to assess the issuance and its social benefits against their own standards and criteria.

But as social projects are more subjective to define, issuers may be held back by the risk of being criticised as "social washing", said Ms Allen.

While HSBC expects this space to grow, the use of proceeds for only social projects could limit participation from commercially-oriented corporate issuers, according to Ms Allen.

Less than 20 per cent of social bonds in Asia-Pacific are issued by corporates, compared with 53.2 per cent by SSAs.

If some issuers perceive no concurrent saving in funding costs, a social bond issuance "may not warrant the effort", said Raj Malhotra, head of debt capital markets at Societe Generale in Asia-Pacific.

"Establishing a programme, obtaining second-party opinions (as well as) identifying, monitoring and reporting uses of proceeds all require an investment by management," he told BT.

As it is, the social bond market is still small and less liquid compared to the broader bond market.

"We often see bonds trading at a 'greenium' for being green, or having other sustainability features, due to the high demand for such instruments," said Marion O'Donnell, associate director of sustainable investing at Fidelity International.

As more issuances arise, there will "hopefully" be the creation of a sustainable bond curve and the convergence of pricing between sustainable and vanilla bonds from the same issuer, she told BT.

Even as social bonds continue to make inroads in Asia's capital markets, analysts reckoned there is still a long way to go in matching green bond issuance levels.

At the policy and regulatory level, structures in place for green bonds are still much more mature, said BNP Paribas' Ms Huang.

Perhaps more importantly, China, Japan and South Korea have all set carbon neutral targets, indicating that greening their countries will be top priority while social aspects will "hopefully stand to benefit" from the greening of industries and supply chains, Maitri's Ms Boey added.

But widespread fallout from Covid-19 is still expected to catalyse greater social regulatory and evaluation practices, Ms Huang said.

In the post-Covid era, broader themes such as the shift away from fossil fuels to renewables and the advent of smart cities also lend themselves to be partially funded through the GSS bond markets, added SocGen's Mr Malhotra.

In June, the ICMA updated its Social Bond Principles to broaden the definition of social project categories and target populations, potentially encouraging more bond issuances.

"It's important to have clarity of the aims and objectives of these types of bonds, in terms of use of proceeds and compliance, as it's crucial to the success of the market's development," said Fidelity's Ms O'Donnell.

DBS head of fixed income Clifford Lee told BT while tighter regulations are, in theory, necessary as issuances continue to grow, the supply of such bonds are already "few and lacking".

"You would want to first get a supply out there. A common set of governing standards has to be developed in time to come, but it is still work in progress because the whole industry is still developing," he said.