How will COVID-19 affect Sustainable Bonds?
05/22/2020
Samantha Azzarello
Hello, my name is Samantha Azzarello, and I'm a global market strategist here at JP Morgan Asset Management. Today's On the Minds of Investors, we're going to talk about sustainable bonds and how has COVID-19 affected sustainable bond issuance.
So, obviously, global governments have been swift and bold in supporting their economies. I say this is building a bridge to get consumers, small businesses, and corporates over the present abyss and to the other side. And that bridge is made of fiscal stimulus. So given the depth of the abyss, more stimulus and more debt issuance may be required.
Now, the stimulus has and will continue to come in many different forms. And along with traditional government bond issuance, we've also seen an increase in the issuance of sustainable bonds. Now, sustainable bonds refers to a broad complex, including three types which I'm going to speak to. These bonds are considered impact-oriented or outcome-driven and they're different than traditional bond issuances.
So when we say sustainable bonds, we're really talking about, number one, green bonds. Green bonds are where the proceeds will be applied towards green projects or activities that promote climate change mitigation. I basically want you to think of bonds used for climate change-- helping climate change.
The second type is social bonds. This is when the proceeds will be applied towards projects that promote improved social welfare and positive social impact, specifically think for underprivileged, low income, marginalized, or disadvantaged populations.
The third type of bonds under the sustainable bond umbrella is sustainability bonds. So you can see these words sound of similar, but sustainability bonds are a type under the sustainable bond complex. And this is going to be a hybrid of social and green bonds, effectively proceeds will be applied towards projects that are dedicated to environmental and sustainable outcomes, effectively funding a mix of green and social projects, so a little bit of a hybrid.
Now until recently, we had really only seen growth in green bond issuance, that is green bonds meant for climate change mitigation. And this was rising as we saw more awareness and concern around climate change. By contrast, the other two types, social and sustainability bonds, were less utilized and, frankly, less understood by investors and the market. But if you look at some of the data year to date, what have we seen?
Basically, social and sustainability bonds have been issued specifically to address COVID-19. Looking at data coming from Bloomberg, we've seen that bonds marked as pandemic or the use of their proceeds will be used for the pandemic, we've seen this be concentrated in those social and sustainability bond categories. This is interesting and marks perhaps a changing dynamic, likely due to the obvious and far-reaching social impacts of the global pandemic.
Moving forward, it seems likely that this momentum is going to continue. These types of alternative bonds aren't just appropriate for providing emergency funding during the pandemic but also after, as economies are rebuilding and structural changes are occurring.
Overall, whether we're talking about fixed income or equities, the demand for ESG and sustainable investing assets really across asset classes is expected to grow. And we expect to see further interest, adoption, and use of both social and sustainability bonds.
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Global governments have been swift and bold in supporting their economies, building a bridge to get consumers, small businesses and corporates over the present abyss to the other side. Given the unknown breadth and depth of the abyss, more stimulus may be required.
This stimulus has and will continue to come in a number of different forms, and along with traditional government bond issuance, we have also seen an increase in the issuance of Sustainable bonds – in particular in Green, Social and Sustainability bonds.
Sustainable bonds refer to the broad complex including the three types listed below. These bonds are considered impact-oriented and outcome-driven in issuance and with use of their proceeds.
Year to date more than $100 billion USD of these bonds have been issued globally, and they are defined by the type of projects the proceeds will be earmarked for, as follows:
- Green bonds: proceeds will be applied toward green projects or activities that promote climate change mitigation or other environmental sustainability purposes.
- Social bonds: proceeds will be applied toward projects that promote improved social welfare and positive social impact specifically for underprivileged, low income, marginalized, excluded or disadvantaged populations.
- Sustainability bonds: a hybrid of Social and Green bonds, proceeds will be applied toward projects that are dedicated to environmentally sustainable outcomes – funding a mix of green and social projects as eligible.
Until recently, growth in Green bond issuance was substantial, reflecting rising awareness and concern around climate change and clarity on bond parameters, guidelines and practices. By contrast, the other two types- Social and Sustainability bonds were less utilized, as they were less well-understood by investors. But looking at the below chart, of the bonds issued specifically to address COVID-19 (“pandemic” is marked as use for proceeds), most are concentrated in the Social and Sustainability categories. This changing dynamic is likely due to the obvious and far-reaching social impacts of the global pandemic.
Moving forward, it seems likely that this momentum continues: Social and Sustainability bonds are not only appropriate for providing emergency funding during the pandemic, but also after, as economies are rebuilding and structural changes are occurring. As demand for ESG and Sustainable Investing assets across asset classes continues to grow, we will likely see further interest, adoption and use of Social and Sustainability bonds.
2020 global sustainable bond issuance
USD billions, amount outstanding