07 April 2020
Social bond issuers have a unique opportunity to do the heavy lifting in the fight against Covid-19, writes Christopher Wigley
Progress is being made as the social bond market mobilises to fight Covid-19.
Last week, the African Development Bank brought a $3 billion 0.75% 3 year bond, aimed at providing 'support and financing to countries and businesses fighting against Covid-19'. Similarly, the International Finance Corporation (IFC) – part of the World Bank Group – recently brought two issues, of $1 billion and SEK3 billion ($298 million), to support companies hit by the coronavirus.
Further, the World Bank recently announced a $14 billion package 'to assist companies and countries in their efforts to prevent, detect and respond to the rapid spread of Covid-19'. Worthy as this is, it is not enough.
The social bond market has a unique opportunity to do the heavy lifting in the fight against Covid-19. It may be argued that central banks are almost out of ammunition, with central bank rates at the US Federal Reserve, Bank of England, European Central Bank and Bank of Japan close to zero.
Similarly, it is remembered that roughly three years following the onset of the financial crisis in 2008, there was a sovereign debt crisis, deeply impacting countries such as Italy, Spain, Ireland, Portugal and Greece. Markets were very concerned about the sustainability of government finances and monitored debt-to-GDP ratios very closely.
In contrast, there is approximately $100 trillion available in global bond markets and approximately $70 trillion available in global equity markets. The money is there; it just needs to be allocated in the right way.
Social bonds, in particular, can channel important amounts of that money to fight the Covid-19 global emergency.
Social bonds, like their sister product green bonds, disclose their use of proceeds – for example access to education, affordable housing , health, etc. – and undertake to report regularly (normally annually) on progress and impacts.
This strikes a chord with Millennials, Generation Z and institutional investors, who want not only to know how their money is being used but also the strength of the impact of their investment.
There are, arguably, four stages to this crisis: treating the sick and reducing infections, maintaining business continuity, delivering a vaccine at scale and speed, and economic recovery.
In treating the sick, countries around the world have stated they need medical equipment urgently. Corporates and governments can in theory issue social bonds to finance the re-purposing of factories to produce much needed testing kits, masks, hand sanitiser, ventilators, oxygen, etc. This equipment is needed urgently, particularly in hospitals, doctors surgeries and care homes.
The Covid-19 crisis is a developing world crisis, but it is also a developed world crisis too. It may be argued that perhaps the US needs a form of agency such as The Reconstruction Finance Corporation which helped steer the US out of the Great Depression – and 'Solidarity bonds' to help retail participate in a similar fashion to 'Liberty bonds'.
There are many sound businesses in the developed world, but due to the national lockdowns in many countries, these businesses need finance to see them through the 'peak' of the virus. Again, social bonds can provide the bridging finance to sustain companies through the rough patch and retain experienced employees who will be much needed after the peak.
"Social bonds can provide the bridging finance to sustain companies through the rough patch and retain experienced employees who will be much needed after the peak"
Despite this 'peak', Covid-19 is not a short-term crisis. Conceivably, there could be three waves of the virus. Following other viruses such as SARS, MERS and swine-flu, there could be a further pandemic in the near future.
Additionally, while developed countries are reeling from Covid-19 – perhaps for the first time since the Spanish flu of 1918 to 1920 – the risk to developing countries is as great or greater.
People living in townships in South Africa or in shanty towns in South America and elsewhere live very closely together and if Covid-19 takes hold the impact could be devastating.
We are told that a vaccine is, at best, perhaps six months away and, even then, it will take time to distribute. Indeed, once a vaccine is available the world will need production to be ramped up and for the vaccine to be administered at speed.
The International Financing Facility for Immunisation (IFFIM) led the way in 2006 by issuing the first 'vaccine bond' – or social bond. With years of experience working with GAVI Alliance and the Bill and Melinda Gates Foundation to provide vaccines to children in Africa, the IFFIM has the infrastructure to issue vaccine bonds and administer a vaccine. It would, however, need more support.
"With years of experience working to provide vaccines to children in Africa, the IFFIM has the infrastructure to issue vaccine bonds and administer a vaccine"
Markets have witnessed how Singapore's GDP, quarter-on-quarter, has recently fallen more than 10% following the coronavirus. Similarly, US weekly initial unemployment claims spiked significantly last week. It is not possible to underestimate the economic impact of Covid-19 – with some economists forecasting a deep recession, or even a depression. Economic recovery is going to be all the more important.
Social bonds and green bonds can help with economic recovery. Green bonds can fund green infrastructure such as solar parks, wind farms, green transportation, and so on, as part of a green growth programme. In the same way, social bonds can fund projects in developing countries such as access to drinking water, installing sewers and better sanitation.
However, it is not just corporates and governments that have a part to play here. Supranational banks can play a leading role. It has already been demonstrated what the African Development Bank, the World Bank and IFC are doing, but there are others with the experience and infrastructure to help. However, to meet the scale of the challenge, it is prudent to significantly increase their callable capital from governments.
"The Covid-19 challenge is a new and immense challenge. Social bonds – and particularly those issued by supranational banks – can rise to the occasion"
Governments can issue social bonds to fight Covid-19 but this will still increase their debt-to-GDP ratio. Increasing the callable capital or guarantees to supranational banks has at least three advantages:
Firstly, a guarantee does not carry as heavy a direct obligation as issuing debt; secondly, a guarantee has the advantage of time delay – a government may not need to provide additional capital until a later date; thirdly, as American economist Harry Markowitz said, the only thing that is free in finance is diversification – and so by sharing the burden of projects with others, governments are not taking the strain individually. We are all in this together.
The Covid-19 challenge is a new and immense challenge. Social bonds – and particularly those issued by supranational banks – can rise to the occasion.
Christopher Wigley is a specialist ESG fixed income portfolio manager, formerly at Mirova and Epworth Investment Management.