Social bonds – the darlings of the post-pandemic world?

Written By: Simon Bond Responsible Investment Portfolio Management Columbia Threadneedle Investments

Simon Bond of Columbia Threadneedle Investments looks at the reasons for integrating responsible investment into local authority portfolios

The Covid-19 pandemic has brought about a multitude of changes to our lives. The disruption it has had on societies across the world is unparalleled in recent times, affecting everything from employment, to our health, wellbeing and daily routines. Capital markets are responding to this crisis in a comparatively unsung way that is taking centre stage this year – a record issuance in social bonds.

When considering environmental, social and governance (ESG) investments, social attributes are often overlooked for the more salient environmental and governance characteristics. This was certainly the case pre-Covid-19, with green bond issuance far outweighing social. In many ways, assessing the “E” and “G” aspects of a company is easier: we can measure aircraft carbon emissions or board diversity relatively easily. The “S” is a bit more challenging in that regard.

But while coronavirus has reinforced the importance of ESG overall, it is social that is currently the fastest-growing part of sustainable finance. The pandemic has proved to be a catalyst for a stellar year in specifically-labelled “Social Bonds”: $63 billion was issued from January-July this year, representing a 530% increase versus the same time in 2019¹.

Being part of the solution: advantages of social bond investing for trustees
Crises typically accelerate pre-existing trends, and momentum for social bonds has been building – especially after the International Capital Markets Association, with our participation², published the social bond principles in 2017. These are important guidelines that recommend transparency, disclosure and reporting for bond issuers, and have been updated as recently as June this year.

What made the Covid-19 crisis different is the immediate danger it posed and the fact it came without warning. Yet the speed and volume at which the credit market responded was remarkable, proving it was not only standing ready to respond to a social crisis, it was also capable of addressing its ramifications.

Governments, supranational entities and corporates across the world raised funds that would be exclusively channelled into projects with social outcomes such as health care support, education and job preservation. Investors were able to tell where the money was going and what good it was supposed to be doing. Issuers included World Bank, African Development Bank, Inter-American Development Bank, Council of Europe Development Bank, Banco Bilbao Vizcaya Argentaria (BBVA), Bank of America, and Kookmin Bank in South Korea. Investor interest was so strong that all issues were heavily oversubscribed.

All evidence suggests we won’t go back to where we started. We think that responsible investment will remain prominent in people’s minds as we move through and out of the pandemic. We see companies increasingly focusing on the social side of their business. The crisis has placed a spotlight on firms’ social policies towards key stakeholders including employees, suppliers and customers. Examples of this include the likes of Uber and Lyft partnering with hospitals and local governments to fund free rides for key workers.

For institutional investors and local authority pension funds, social bonds are an opportunity to respond to the crisis, meet investment needs and respond to member interests. It is also an opportunity for investment boards to fulfil their fiduciary duty when it comes to integrating ESG into their investment portfolios, be it via policies in relation to financially-material ESG considerations; stewardship and engagement activities with investee companies, or ESG arrangements with asset managers.

Indeed, the Impact Investing Institute has designed a set of principles to help trustees navigate and respond to these societal and regulatory expectations. The first of which is to adopt a “transitional mindset” whereby they manage the risks and seize the opportunities presented by the move towards a net-zero carbon economy, and other major societal transitions such as this latest crisis.

Principle three, meanwhile is the identification and appointment of investment consultants who are aligned with your investment beliefs and objectives, and investment managers who can achieve your scheme’s impact objectives through their investment and stewardship activities. This is responsible investing in a nutshell.

Our experience and social bond strategies’ track record prove that one can do well by doing good. While the most important criteria we look at are the financials – first and foremost a company needs to be financially viable in order to deliver impact – our strategies have successfully achieved both a financial return and positive societal impact. Our UK, European, US and Global Social Bond Funds have this year broken through $780 million in assets under management, showing growth of 32%, 50%, 24% and 13% respectively.

We are only beginning to learn which long-term trends will emerge as a result of the pandemic, but the heightened sensitivity towards social issues is likely here to stay. Investing in support of the global challenges we face, risk-managing portfolios in the challenging environment the future holds, and helping investment boards meet their regulatory duties; all this can be achieved by integrating responsible investment into local authority portfolios.

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1. Bloomberg, July 2020

2. Simon Bond served on the ICMA working group that developed and published the social bond principles in 2017 and has agreed to continue to serve again in every year since.