Cover story – Covid bonds
quick to embrace the trend. Examples include €514bn (£461bn) Dutch pension scheme ABP. “We started investing in Covid bonds in mid-March, and as of early June, we had just over €500m (£451.5m) invested as part of our broader ESG bond portfolio,” says Asha Khoenkhoen, a spokesperson for the scheme. “It should be added that we already had a significant amount of money in ESG compliant bonds. By the end of 2019, we had some €7.6bn (£6.8bn) invested.” She distinguishes between two main stages of the investment, which is focused on AAA-rated bonds issued by development banks and with a maturity that falls between two and 10 years. “The initial round of investments was dedicated to funding the temporary expansion of healthcare facilities, the second round of funding will now focus on how to get the economy going again and to support SME businesses struggling with the effects of the lockdown,” Khoenkhoen adds. Another pension scheme which is likely to have exposure to Covid bonds but doesn’t disclose its individual holdings, is Jap- anese pension giant GPIF, which by the end of last year man- aged some ¥159trn (£1.1trn) in assets. The scheme has recently launched initiatives to support ESG bonds with 10 multilateral development banks and four development financial institu- tions. This includes social bond initiatives with the European Investment Bank, the World Bank, the European Bank for Reconstruction and Development and the African Develop- ment Bank, all of whom have issued Covid bonds. A spokesperson for GPIF told portfolio institutional that there was a possibility of the pension giant being invested in this market, provided the underlying assets had a AAA-credit rating and were in line with ICMA principles.
Closer to home, government workplace pension scheme NEST also holds Covid bonds. Anders Lundgren, NEST’s head of public markets and investment strategy, confirms that there has been a notable uptake in demand. “We’ve seen a recent increase in the issuance of social bonds with proceeds ear- marked for pandemic-related purposes.
“While the majority of these have come from supranational or government-related agencies, there have been those issued by corporations too,” he adds. The issuance of Covid-related bonds should increase in the coming months as various issuers look to meet unique financ- ing needs created by this pandemic. These bonds have the potential to generate competitive yields while also helping to meet the financing needs created by the virus,” he adds. NEST has been able to mitigate the need for additional credit research by investing through two externally managed fixed income funds as part of its default portfolio. These investment- grade fixed income funds are, among others, invested in Cov- id-19 bonds issued by Bank of America.
24 | portfolio institutional July 2020 | issue 94
“The proceeds will be allocated to health care industry lending in the firm’s global commercial bank, specifically not-for-profit hospitals, skilled nursing facilities and manufacturers of health care equipment and supplies,” Lundgren says. Yields for the Bank of America bond exceed benchmark treasuries by 1.3%.
Beware of bluewashing Given the ambivalence of a Covid bond, the question arises how far issuers can push the concept before they start being accused of “bluewashing”, the social bond equivalent of greenwashing. Institutional investors might want to consider carefully to what extent the refinancing of a meat factory or an airline could be seen as playing a part in tackling the pandemic, rather than being a bog-standard corporate bond investment. Given the more stringent ESG reporting requirements for UK pension scheme trustees, awkward questions may have to be answered.
Andy Cheseldine, a professional trustee at Capital Cranfield, warns that investors should bear in mind that Covid bonds are not necessarily social bonds. “There are a lot of, dare-I-say, weasel words around Covid bonds,” he warns. Nevertheless, if chosen wisely, Covid bonds could offer diversi- fication potential. “Assuming they have been properly struc- tured, Covid bonds should be well uncorrelated with markets,” adds Kevin Wesbroom, who is also a professional trustee at Capital Cranfield. Dutch pension scheme ABP attempts to pre- vent bluewashing by only investing with development banks. “These banks have a completely different setting than corpo- rate bond investments. They have been established precisely to offer financial support,” Khoenkoen says. “They also have extensive reporting requirements.” In addition, ABP’s administrator, APG, has set up a framework in collaboration with PGGM, which with €238bn (£215bn) in assets makes it the second largest pension fund in the Nether- lands. Both asset owners have launched an AI-powered plat- form to test ESG investments based on the United Nations’ Sustainable Development Goals. The initiative, which is a col- laborative effort open to pension schemes around the world, could also be a useful measure for UK schemes to assess the validity of their ESG investments. USS is one of the UK schemes interested in the screening process, according to David Russell, head of responsible investment at the £66bn scheme.
Assessing credit risk
Another key factor to bear in mind is the potential for default risks. As the costs of the pandemic are rising, so is the likeli- hood that some issuers might not be able to pay back those loans.
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