5 May 2020

Sovereign social bonds to protect lives and livelihoods

An exceptional shock deserves an exceptional response, argues Farah Imrana Hussain

Covid-19 has presented unprecedented challenges to the world. Both developed and developing economies are struggling to save lives, while grappling with the economic pain of shuttered offices and businesses and bracing for a global recession. For low and lower middle-income countries, it is as much a humanitarian crisis as it is a health crisis. Trillions of dollars will be needed to contain the damage.

The global community has joined forces to meet these challenges.

Over the next 15 months, the World Bank Group will be providing up to $160 billion in financing tailored to the health, economic and social shocks countries are facing, including $50 billion to the world’s poorest countries on grant and highly concessional terms. The IMF has increased its emergency financing capacity to $100 billion to meet expected demand.

Governments themselves are rolling out $8 trillion of fiscal stimulus packages. They need to provide citizens with better access to healthcare, improve surge capacity, train emergency healthcare professionals, purchase medical and laboratory equipment, develop vaccines and/or medications, etc.

Beyond healthcare, governments need to finance lifelines for small businesses, social safety nets for poor and vulnerable populations, etc. Only sovereign issuers have the policy role and the capacity to finance the delivery of public goods and implement such large-scale investment programmes in a crisis situation.

As the extent of the shock unfolded, a number of European sovereigns rushed to the capital markets to meet the needs of their sizable fiscal packages. While most of these issuers did not directly cite the purpose of their increased funding, the intention was clear from their increased fiscal spending requirements and larger print sizes. The demand-side responded with very large orderbooks, larger order sizes, and increasing numbers of investors.

European sovereign issuances on the back of increased funding needs to support Covid response.

Source: JPMorgan


Supranationals boost lending capacity to fight Covid-19

Unlike sovereigns, the supranationals that went to the capital markets in the wake of the crisis highlighted the use of proceeds to support the fight against the virus. Among them were the IFC ($1 billion issued on March 11), the European Investment Bank (€1 billion issued on April 1), the African Development Bank ($3 billion issued on April 2), Council of Europe Development Bank (€1 billion issued on April 2), and the World Bank ($8 billion issued on April 25, followed by three others in quick succession, bringing the total to $15 billion). All these issuers enjoyed tremendous demand from investors keen to contribute to this urgent task.

"The final book for the World Bank Sustainable Development Bond that raised awareness for its phase 1 Covid-19 response was over $12.4 billion and contained around 190 investors – a record even for one of the most coveted issuers in the world"

Central banks and official institutions, bank treasuries, and asset managers including impact investors, posted bids exceeding $4.6 billion for the African Development Bank bond. More than 150 investors participated in the EIB bond as final orders reached €7.3 billion. The CEB bond gathered the largest order book of any CEB benchmark to date, with final books standing in excess of €4.5 billion. The final book for the World Bank Sustainable Development Bond that raised awareness for its phase 1 Covid-19 response was over $12.4 billion and contained around 190 investors – a record even for one of the most coveted issuers in the world.

Leveraging the financial firepower of the impact investing community

Although the supranationals used different names for their bonds, this type of labeled bond that aims to address or mitigate a specific social issue and/or seek to achieve positive social outcomes is generally known as "Social Bond". These bonds are in huge demand from investors that place sustainability at the center of their investment approach, i.e., invest specifically with the intention of generating positive, measurable social and environmental impact alongside a financial return.

The Global Impact Investing Network (GIIN) estimates the current size of the impact investing market to be $502 billion. These investors include fund managers, pension funds and insurance companies, family offices, banks, financial institutions, religious institutions, as well as individual investors.

As governments look to unlock additional critical financing, tapping sustainability-minded investors in the capital markets stands out as a viable solution. There are two clear benefits. Firstly, the social label of the bond drives demand, allowing the issuer to expand and diversify its investor base compared to conventional debt issuances, and secondly, it helps the issuer attract international investors.

On April 21, Guatemala did just that, becoming the first sovereign to issue a Social Bond to finance direct response to Covid-19, including initiatives to improve health center infrastructure and food security; support professionals and companies by providing loans through the Capital Protection Fund and the Micro, Small and Medium Enterprise Fund; provide medical insurance to students; promote preventative health and medical practices; etc. The bond was 7.7 times oversubscribed.

Meeting impact investor expectations

Transparency and accountability are key for impact investors and therefore the label is important. Social Bond issuers are expected to follow the four core components of the Social Bond Principles, which include clearly defining the use of proceeds, clarifying the process for project evaluation and selection, managing the proceeds of the bond and reporting the allocation of proceeds as well as expected impact. As with labeled Green Bonds, investors expect an independent external reviewer to provide a second-party opinion or verification of internal processes.

The World Bank helps public sector issuers, including sovereigns, follow international best practices for the issuance of different types of thematic bonds, including social, green and blue bonds. This takes the form of technical assistance to walk the issuer through the pre and post-issuance phases.

Issuers learn from the World Bank's experience of issuing more than $50 billion of Sustainable Development Bonds per year to support the financing of projects that tackle the world's most difficult development challenges and contribute to the Sustainable Development Goals. As an innovator and leading issuer in capital markets for over 70 years, the World Bank plays an important role in pioneering financial tools that deepen and expand markets and provide the financing needed.

Farah Imrana Hussain is a senior financial officer in the Financial Advisory and Banking department of the World Bank Treasury

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