ESG – News
PANDEMIC TO DRIVE SOCIAL BOND ISSUANCE SURGE TO £75BN DURING 2020
The Covid-19 pandemic has not only caused unprecedented economic and social destruction, but it has also accelerated the rise of the social bond market, which is on course to raise $100bn (£75.5bn) this year. Until last year, social bonds were a niche in the growing sus- tainable bond market, with investments in social causes accounting for a mere 5% of the total market, according to rat- ing agency S&P Global. But the pandemic is driving a dramatic change in the composition of sustainable debt. While issuance slowed at the start of 2020, the Climate Bonds Initiative says, demand to invest in social causes has since surged to a new record. By October, the issuance of such debt had quadrupled to $71.1bn (£53.8bn) when compared to the same period a year earlier. This has taken the value of the sustainable bond market to $500bn (£379bn). Many of these bonds have been issued by inter-governmental organisations, such as the EU, or local authorities with high credit ratings.
The financing of the EU’s unemployment scheme illustrates the level of appetite to invest in social causes. The EU targeted €17bn (£15.2bn) to fund its SURE unemployment scheme with bonds maturating in 10 and 20 years, but it was nearly 14 times oversubscribed with investors willing to commit around
€233bn (£209.3bn). These bonds offer a higher yield than con- ventional sovereign bonds. The EU’s SURE bonds, for exam- ple, pay a higher coupon than German bunds despite the EU’s rating A-.
In terms of sector exposure, social bonds also offer a relatively broader spectrum of diversification. Debt funding for socio- economic advancement accounts for almost a third of social bonds issued, followed by housing (21%), education (20%), healthcare (11%) and essential infrastructure (13%), according to S&P. But just as with its bigger sibling, the green bond market, the rapid rise of social bonds, and Covid-bond branded debt, has sparked concerns over how the proceeds are used. There is no legally enforceable standard of what constitutes a social bond. The most commonly recognised standard has been set by the International Capital Markets Association (ICMA) in Zurich. But this framework focuses on whether the proceeds will ulti- mately be allocated to the cause that the marketing at the road- show said it would be, leaving some wriggle room to initially use the funds for other causes.
The ICMA lists more than 60 social bond issuers who have pledged to commit to its framework, ranging from international development banks to multi-nationals, such as Danone and Ford, Russian lender Sovcombank and Indian outfit Shriram Transport Finance. UK social bond issuers include SAGE Housing, the International Finance Facility for Immunisation and MORhomes.
AGRIBUSINESSES ARE THE KEY CULPRITS BEHIND GLOBAL DEFORESTATION
While big supermarkets and household brands have faced growing consumer pressure on their role in deforestation, sup- pliers have gone largely unscathed, charities warn. The destruction of the world’s largest rainforests increased sharply in 2020. By October, deforestation of Brazil’s Amazon Rainforest increased by 50%, year-on-year, according to space research agency INPE. The destruction of the “lungs of the Earth” has accelerated exponentially since Brazil’s president Jair Bolsanaro took office in early 2019. But the drivers are financial, rather than political. Agriculture and forestry sectors, such as cattle, soy, palm oil and timber, are responsible for 80% of deforestation globally. In turn, their business models are also exposed to significant transition risks, as a report by environmental disclosure specialist CDP. The report highlights that among others timber and palm oil companies have made relatively more progress, while cattle and soy industries have not yet come up with independent
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deforestation certificates and have failed to make progress on deforestation.
Another factor in controlling deforestation is who owns the land. Landownership or long-term leases tend to be more com- mon among timber and palm oil businesses, giving them greater autonomy to manage deforestation risks, according to CDP. In contrast, fewer soy or cattle companies directly own the land they work on, which restricts their ability to manage deforestation. With a third of all soy company supply chains unmapped, it is unclear whether future crops are dependent on grounds that have already been, undermining the sustaina- bility of their business model. Soy and cattle companies carrying the highest transition risk are Minerva Foods and JBS, followed by Glencore Agriculture and Marfrig, CDP claims. Among timber producers, US firms International Paper and Weyerhaeuser have been flagged by the environmental disclosure charity for having unsustainable business models. Palm oil producers FGV Holdings Berhad in Malaysian and Singapore firm First Resources also face high levels of transition risk.
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