Asia's SSAs fall short as social bonds hit the Covid-19 agenda
Against a paucity of issuance, SSAs outside Asia have been busy printing public offshore bonds in dollars and euros, for an almost US$10 billion-equivalent tally
5 Jun 2020 | Jonathan Rogers

ASIA'S sovereign, supranational and agency (SSA) sector has been egregiously slow off the mark when it comes to issuing social bonds - an instrument which has been definitively marked as apposite to the public sector response to the ravages of Covid-19.

Prior to the Covid-19 onslaught, these bonds, which can fund, amongst other things, employment generation, medical equipment manufacture and social services, were beginning to emerge as a newly noticed instrument within the sustainability arena and catching the powerful wave of ESG investment which has surged globally in the past couple of years.

The emergence of Covid-19 has only sharpened the bonds’ use of proceeds focus and social bonds stand on the edge of a full-on issuance deluge as the virus’ economic and social impact unfolds.

But in contrast to the SSA space in Europe, Africa and under the Bretton Woods umbrella (the World Bank Group), which has priced a plethora of social bonds since the Covid-19 crisis emerged, Asia’s SSA sector has printed just one issue in social bond format.

This is defined as issuance which meets the Social Bond Principles (SBPs) propounded by the International Capital Markets Association (ICMA) in 2018, and in Asia it emerged just over a week ago in the form of a US$3 billion five-year from the Asian Infrastructure Investment Bank (AIIB).

Against that paucity of issuance, since March - when lockdowns began to be imposed with consequent brutal economic fallout for both mature and developing economies - SSAs outside Asia, including the International Finance Corporation, the African Development Bank, the European Investment Bank, the Nordic Investment and France’s Caisse Francaise De Financement Local have been busy printing public offshore bonds in dollars and euros, for an almost US$10 billion-equivalent tally.

This is not to suggest that Asia’s SSAs have failed to respond to Covid-19 with funding - both the AIIB and the Asian Development Bank (ADB) have each stepped up with chunky loan facilities totalling US$10 billion and US$20 billion respectively - but that they are late in recognizing the powerful opportunity they have to develop an emerging asset class that is likely to prove crucial in mitigating and fighting the economic impact of the coronavirus.

The printing of social bonds en masse by the SSAs in Asia will provide much needed benchmarking for the FIG and corporate sector looking to issue the instrument as well as tapping private sector funds and, in the process, spreading the financing risk away from the public sector.

For multilateral development banks (MDBs) such as the AIIB and the ADB this will in no way encroach on the concept of additionally which is axiomatic to their mission statements.

Under the Hamburg Principles by which MDBs operate they are duty bound to not crowd out the private sector in their operations, but to assist that sector in their capital markets fundraising in a collective effort to meet sustainable development goals. As well as issuing in social bonds, the Asia-focused MDBs should look to help the private sector in structuring social bonds, providing guarantees and backstop bids for issuance.

In the Asian sovereign space, only the Republic of Indonesia has stepped up with explicit Covid-19 response bonds, via its biggest-ever issuance - at US$4.3 billion - in multi-tenor format, printing at 10, 30 and 50 years. The bond was hyped in Asia’s financial community as a social bond in anything but name, going as it did to a large swathe of ESG-focused investors.

There are a few caveats to that hype, including the fact that issuance at such long tenor would be inappropriate to the social bond format under the SBPs, given the relatively short duration of underlying projects to be funded by use of proceeds.

And the ICMA bond principles exist for a reason: to satisfy asset managers that issuance in social bond format is what it claims to be on the tin - that it complies stringently with defined social aims in terms of use of proceeds and that compliance with these aims is monitored by a second-party verifier for the life of the bond.

In the world of ESG where definitions, measurement and monitoring are not a mere bagatelle - the idea of “social washing” just like its counterpart in the sustainable investing movement “greenwashing” is anathema to any ESG-aligned asset manager looking to fulfil his fiduciary duty - and issuing in ICMA-compliant format should not be seen as a luxury but as an essential, and one that is crucial to the social bond market’s development.

A few arguments have been bandied about in Asia’s DCM community to explain the relative lack of social bond issuance from Asia’s sovereigns, supranational and agencies - as well as from the financial and corporate sectors.

One is that they were ill-prepared to structure social bonds appropriately, having failed to put in place ICMA-compliant procedures. Another is that it was “too much hard work” even if the diligence boxes had been ticked and that it was smoother to tap with a directive on use of proceeds in relation to Covid-19: perhaps Indonesia’s trade falls in that category.

And there has also apparently been a reluctance to print amidst wider secondary bond market credit spreads. None of these arguments impresses amid the Covid-19 crisis and it behoves Asia’s SSA sector to get its act together and issue.

It was left up to Bank of China Macau to get the ball rolling in social bond issuance from Asia with a US$638 million SBP-compliant social bond all the way back in February, demonstrating in the process the potential of the product as well as its ability to appeal to the local currency bid - the print came in Hong Kong dollars and Macanese Patacas.

It should not be up to the FIG sector to lead the way in social bonds in Asia - that task belongs to the SSAs. And it is to be hoped that an Asian sovereign will follow Ecuador’s lead from January in the pricing of a social bond. As the region’s developing economies face double digit economic contraction this year thanks to Covid-19, the need could not be more pressing.

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