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Social bonds strengthen foothold in Asia credit market
Issuance surges as funds are redirected to pandemic relief and economic recovery efforts
16 Nov 2020 | Tom King

Green bond issuance in Asia-Pacific in the second quarter fell to its lowest level in more than three years, according to a recent report. Amid the Covid-19 pandemic, new debt is being increasingly redirected to social and sustainability bonds targeted at supporting the rising public health needs and growing economic disparity.

From less than US$20 billion in 2019, issuance of social bonds globally shot up more than five times to approximately US$105 billion as of October 2020. Green bond issuance, meanwhile, has since recovered, reaching US$258 billion year-to-date and exceeding the 2019 total of US$234 billion.

In the Asia-Pacific region, distribution of social bonds rose 29% this year through June 15 from a year earlier, as reported by S&P Global Ratings. And green bond issuance was outstripped by social and sustainability bonds in April this year for the first time.

Social bonds are less well known than the now firmly established green bonds, perhaps because environmental issues impact us all and are easier to comprehend, but they are now gaining momentum in the region.

The instruments allow investors to raise funds for projects with positive social outcomes that can include basic infrastructure, affordable housing, microfinance, food security and access to essential services.

Edris Boey, ESG practice lead at Maitri Asset Management in Singapore, says social bonds could be very beneficial for Asia’s developing nations, given the nature of the social development projects needed in the region’s many vulnerable communities, the target of eligible projects funded by these bonds.

In terms of the United Nations’ Sustainable Development Goals, improvements in areas of clean water and sanitation, affordable and clean energy as well as industry, innovation and infrastructure will bring about the greatest benefits to developing Asia.

Prior to the pandemic, it was estimated that the five key developing ASEAN markets (Indonesia, Thailand, Vietnam, Malaysia and the Philippines) would need US$1.3 trillion worth of investment to achieve these three goals with a shortfall of US$537 billion. However, this gap is expected to increase with the global recession.

“Extreme poverty was expected to be eradicated in ASEAN by 2030, but with the economic uncertainty of Covid-19, this looks less likely as more people are falling into or back into poverty, indicating a growing vulnerable population,” Boey says.

She cites the case of Indonesia, where at least 3.7 million citizens are estimated to be thrust into poverty as a result of the pandemic.

“While international agencies such as the World Bank (through the International Finance Corporation), supranational institutions and regional development banks have been providing aid directly to the region’s developing countries, Asian governments and institutions have been slow to issue social bonds. With Asia’s much needed social projects, social bonds should be increasingly explored as an alternative source of funding,” Boey adds.

Increased issuance

Raj Malhotra, head of debt capital markets, Asia-Pacific, at Societe Generale, points out that more sovereigns, supranationals, agencies and financial institutions have significantly increased their issuance of social/sustainability bonds in recent years, setting up multi-category frameworks covering both green and social themes.

“A few years ago, green bond issuance clearly dominated, but this year social/sustainability bond issuance accounts for over half the volumes from the green, social and sustainable space globally in 2020 to date, versus around 13% in 2017. The pandemic further pushed issuers’ social agenda, with a large number of Covid-19 bonds printed to finance healthcare, unemployment support and SME financing,” Malhotra says.

“In Asia, and Korea in particular, there has been a significant increase in such issuance in 2020, as banks and sovereigns have sought to raise funds and deploy them towards pandemic relief measures.”

This year’s events have highlighted the underinvestment in public healthcare and welfare in many societies, and as a consequence social bond issuance has surged.

Atul Jhavar, head of APAC green and sustainable capital markets at Barclays, expects to see continued growth of social bonds in 2021.

“Green bonds are certainly the most established part of the ESG-related bond market.  We expect them to remain the largest segment of the market in the foreseeable future, given the strong global focus on tackling climate change. However, it has been encouraging to see very strong growth and support for social bonds from issuers, investors and regulatory bodies in 2020,” he says.

Jhavar believes there will be a sustained demand for such bonds in emerging markets, as they can channel financing towards activities like affordable housing, basic infrastructure, education and healthcare.

“In crises such as the current pandemic, there is a place for social bonds across the globe, as governments tackle the socio-economic impact in areas such as SME support and unemployment.”

Boey points out that while social bonds were previously overshadowed by green bonds, this will not be the case post-Covid. “The pandemic has taught us that social bonds have a place in society.”

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