Keesa Schreane [00:00:08] We're seeing a domino effect. What started as a health outbreak quickly became a global pandemic. We're experiencing historic market slides. S&P 500 saw one of its deepest declines in history between mid-February and March. But luckily, diverse solutions and concepts are emerging in response to this crisis. And one of them is social bonds. Today, we're going to discuss social bonds and if they have the potential to perhaps save the economy. I'm here with Chris Wigley, a fixed income specialist and portfolio manager. Chris, welcome. So, Chris, what are social bonds and how are they positioned to provide some help to our economy right now?
Christopher Wigley [00:01:02] So you may be familiar with green bonds and social bonds, are the system product to green bonds, very similar. Now, there is a global organization with the green and social bonds with the important principle to coordinate today the growth of the green and social bond market and essentially defining social bonds. There are four pillars, but two of the most important are mandatory. So first of all, a social bond has to disclose the use of proceeds. So when you normally look at a conventional bond prospectus, as you say, you can use the proceeds and it will just say the general corporate purposes. So investors don't know how the money is going to be used. However, a social bond discloses how the money will be used. It could be for affordable housing. It could be for access to education or it could be access to health as well. Now, the other key to the whole social bonds is that unlike conventional bonds, the issuer undertakes to report on a regular basis. It's normally annually. And increasingly, it includes impact ripple, too.
[00:02:20] So this really strikes a chord with investors today, whether they be millennials or Generation Z or institutional investors. Increasingly, investors want to know how their money is being used. You don't want it to necessarily go with things like parliamentʼs or tobacco and other issues like that. But they do want it to go to thoughtful green purposes like climate change or for social purposes as well. So there is a key opportunity now with this pandemic that's affecting all of us at the moment.
Keesa Schreane [00:03:00] OK. So that's a clear understanding of what they are in. Thanks for putting that in the context of green bonds. Now give us a bit more detail on how they can help us at this point. What should investors, institutional investors look to do? Use these social bonds to really help them with their investing in the middle of this crisis?
Christopher Wigley [00:03:22] So we have a unique position now. So something like twelve years after the financial crisis, economies have been recovering, but we're now faced with this pandemic. Fortunately, following the financial crisis, a lot of central banks are not in a strong position they were 12 years ago. Interest rates are very much lower than they were, very close to zero. In many economies. And so it could be argued that the central banks are starting to run out of ammunition, which means that the markets and individuals will be turning to governments instead. But as we know, the financial crisis, again, three years after the financial crisis, we have the sovereign debt crisis that really affected countries like Portugal, Italy, Ireland, Greece, Spain, for example. So countries have been very mindful of that debt to GDP ratio. So which really leaves everyone with a dilemma as to where do we turn next.
[00:04:44] So the recent program from President Trump amounts to 2 trillion, which is a very sizable amount. But of course, it's much smaller than the one hundred trillion that's available in global markets, and there’s about 70 trillion dollars available in equity markets too. The social bond product is a way of actually channeling those funds into projects that can really help us right now. So as I say, the social bond product discloses the use of proceeds and that use of proceeds could be, for example, to fund vaccine programs or it can help with economic recovery as well.
Keesa Schreane [00:05:27] So we'll discuss specifics. I mean, what countries and what supra nationals are really working on this right now? Who's doing it well and what are they doing?
Christopher Wigley [00:05:39] So the social bond market is about 14 years old now, first social bond was issued in 2006 significantly by the supranational called IFFIm - the International Finance Facility for Immunization. So this is a supranational backed by countries like Britain and France and Sweden and the Netherlands, for example, to actually fund a vaccine program, in this case, helping children in Africa. But the key thing is here that if you have the history and the expertise of issuing social bonds into the market to fund this program. And of course, we are faced to a very severe pandemic now. So that's one element of the social bond market. And there are other issues of currency market as well. Another example is the American Development Bank, triple-A rated, they had a product for a number of years. Specifically, they call it the EYE that stands for employment, youth and education. So you can see the sorts of projects where funds can be useful. And it's not just these issues. The other issuers as well, are, for example, IFC, who is a part of the World Bank, also the European Bank for Reconstruction and Development and other supranational too. In total, the size of the market is in the region about 50 billion dollars or so in growing.
Keesa Schreane [00:07:30] OK, great. Great. I'm really curious to talk a bit about the so-called COVID-19 bonds. I know that the African Development Bank is participating in the Fight COVID-19 Bond. I really would like to get your thoughts on what that consists of. And if we see those types of bonds, specific to this outbreak really emerging?
Christopher Wigley [00:07:50] This is really interesting because we have, as we said earlier, a unique challenge and the supranational banks to rising to this challenge. So just in recent days, we've had news that banks actually looking to launch and there is one, as you mentioned, the African development. That came the market yesterday. So this was three billion dollars in size. It was a three year bond to the point 75% percent coupon. And here the money was specifically going to be used to create conditions for economic recovery following the curve with COVID-90 borrowers. It's to support them to find those countries with the business to fight really against COVID-19. And similarly, it's not just the African Development Bank. We also have news that the Inter-American Development Bank, too, is going to launch a COVID-19 bond. Again, here it's probably going to be a five-year issue. And again, they're saying that this is going to help countries in Latin America and the Caribbean cope with the challenges posed by the pandemic. So supranational rising to the occasion could be a super important source of funds going forward.
Keesa Schreane [00:09:21] And in terms of what the funds or the site are designed to do and taking this one specifically fighting the most urgent needs in terms of medical equipment, drinking water, things of that nature, how can people see their real effects, some as well as in social investors and individuals, see the real effects of what can happen as a result of having these types of social bonds in the market? What is the end result?
Christopher Wigley [00:09:47] So we can perhaps look at a challenge facing this in full stages. So someone is actually tried treating people who are sick and try to reduce the risk of infection. The second stage is business continuity. A third stage is to deliver a vaccine and then a fourth stage is to deliver economic recovery. And at the first stage, the most challenging we're hearing around the world is the provision of testing kits, masks, ventilators, and oxygen. And there's no reason, in theory, why social bonds shouldn't be able to fund those programs in some way. For helping a factory to repurpose themselves for this production. And this might actually call for some social bonds to be issued by corporates.
[00:10:46] Another state is business continuity. So here, sub-national banks may be able to assist economies while they go through this peak of infections. A third stage is delivering a vaccine at scale. I mentioned earlier the International Finance Facility for Immunization. Now, as you say, they have experience in issuing social bonds or vaccine bonds to fund the program.
[00:11:19] What are we going to be faced with when a vaccine is eventually available is that it needs to be in sufficient size and then it needs to be delivered to the population at speed and proceed as quickly as possible. And then fourthly, we talked about economic recovery. This is very important. We were hearing that the purchasing managers index is plummeting. We've heard recently that Singapore's GDP had fallen more than 10 percent. The forecasts offered significant decline in GDP growth in the economy. Some economists are talking about a deep recession or even a depression. So economic recovery is going to be crucial. Again, I think not only social bonds, the green bonds could play a key role in economic recovery.
[00:12:15] So, for example, Green bonds could help in terms of green infrastructure. There is a need for more green transportation to be built. There's a need for more renewable energy in terms of solar energy and wind farms, for example. And this is all called green growth. Also, social bonds can assist with social infrastructure. Because it's also going to be needed, particulary in the developing countries, to have greater access to drinking water, sanitation, for example. So these are projects that social bonds can fund, too. So in the economic recovery stage is a key role that can be played by those social bonds and green bonds.
Keesa Schreane [00:13:08] So, Chris, we've talked about the transparency that social bonds provide. We also talked about what we've learned from the financial crisis that took place over a decade ago and also what social bonds are delivering. We've talked about that and how they can support economic recovery with these very timely examples. What are the top three focus points that Institutional investors should think about when considering if social bonds are the right tool for them for their portfolio?
Christopher Wigley [00:13:42] Well, as you say, some key elements are the transparency of social bonds and also the impact of social bonds itself. And these are the two additional things that social bonds provide compared to a conventional bond. Social bonds should yield the same as a conventional bond through the same issuer because the credit risk is the same, but the investor gets something additional. That's the transparency and the impact. So it's a win for investors. We also have to bear in mind that it's a win for issuers as well. Because by issuing social bonds, they are also increasing their investor base; But is also a win in the fight against this pandemic. So you could say it's a win-win-win situation. But in addition to all this, what I would note is that during this crisis, credit spreads were relatively tight - in the region of about 100 basis points for the US dollar corporates. And since then, they've gone down significantly to about 400 basis points. And that's the wides decrease since the financial crisis. So it's possible to say that relatively speaking, social bonds, offer more value than previously.
[00:15:13] The second point is that during this crisis, economists all forecasting, unfortunately, that there will be earnings downgrades that will mean credit downgrades and therefore some credit defaults as well. So the risk out there is forecasted to increase; now uniquely for the social bond market, it is very much dominated by supranational banks that are triple-A rated and Double-A rated. And so the credit risk is lower there. So we can say that social bonds issued by the supranationals are set to be relatively attractive in terms of credit protection. And the third point. Well, we can highlight here is that with the full-cost scenario, the deep recession, or depression, then there will be more volatility in risk assets. And that means that asset classes such as bonds, including social bonds, may play a key role in investor portfolios in terms of lower volatility in this time of uncertainty.
Keesa Schreane [00:16:35] All very good points for credit risk and potentially lower volatility. Chris, thank you so much for your insight on social bonds and thank you for joining us today.
Christopher Wigley [00:16:44] Thank you very much indeed for the invitation.
