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  4. Episode 28: Social Bonds Q&A: What Makes a Good COVID-19 Bond and What to Expect Post-Crisis

Guest speakers:

Viola Lutz , Head of Investor Consulting Climate, ISS ESG

Federico Pezzolato, Vice President - Sustainable Finance Business Manager, ISS Corporate Solutions

Christopher Wigley, independent ESG & Fixed Income Portfolio Manager

Social Bonds Q&A: What Makes a Good COVID-19 Bond and What to Expect Post-Crisis

Episode 28 | Duration: 17 minutes

In April, $12.7 billion worth of social bonds were issued around the world, more than the total amount raised in 2019. What role will COVID-19 bonds play in the post-crisis world, and what makes a good Corona bond?

  • Keesa Schreane [00:00:00] Historically, the role of social impact bonds have been downplayed when compared to other areas of ESG investing. However, the COVID-19 crisis triggered a sudden increase in issuance in April. 12.7 billion dollars worth of social bonds were issued around the world, more than the total amount raised in 2019.  

    Keesa Schreane [00:00:22] Joining us today to give more insight into the new bond market instruments, we have Chris Wigley, ESG fixed income portfolio manager, Viola Lutz, head of Investor Consulting, Climate, at ISS ESG. And Federico Pezzolatto, sustainable finance business development manager at ISS.  Thank you all so much for joining.  

    [00:00:50] So, Chris, let's start with you in terms of the role that COVID-19 bonds are playing now in solving the current crisis, how they've been performing so far? And let's look at this from a global perspective and let's see who's outperforming whom, if you will, in the various regions.  

    Chris Wigley [00:01:07] This is very interesting because back to the beginning of March, there were no COVID-19 bonds issued at all. But since then, we've seen incredible amounts of activity. So there may have been about 40 to 50 different bond issuers, amounting to about 70 billion in total. And there are perhaps three types. There are COVID-19 social bonds, there are COVID-19 sustainability bonds, ad there are COVID-19 general proceeds bonds as well. And over time, more and more of those bonds have complied with standards such as social bonds and sustainability bonds. But also, if we take a regional view, we can see that there have been COVID-19 response bonds issued around the world. So there have been bonds issued to cater to the needs in South America and also Africa and also Europe and also Asia as well. So we have a very vibrant market here and in terms of market numbers, since the beginning of the middle of March, we've seen credit spreads actually tighten generally for the market for certain supranationals by about 20 basis points. And we've seen the same behavior as well from COVID-19 respond bonds.   

    Keesa Schreane [00:02:36] So Viola I want to get you in here to really get an understanding of the difference that investments in COVID bonds are really making right now, you're in the climate space. You have a key insight into what's happening in the space. What's really making a difference in what's really moving the needle? You let us know if you see a big difference being made with these new COVID-19 bonds. And if so, what kind of differences?  

    Viola Lutz [00:03:03] Absolutely. And many thanks for having me on today. Maybe briefly, in terms of my participation today in that my responsibility of Head of investor consulting climate. I also oversee in general our SPO operations and methodology. SPO means second party opinion on exactly social and green bond issuance. I would say we definitely see a big difference that is being made with these COVID-19 bonds. And one of the key elements that I would highlight is the emergence of the "S", so the social element within the ESG space and then increased prominence of social topics. And I think the COVID-9 bonds are putting the finger on a very, very important topic. More generally, I think that is ESG can make statements about and that is also about economic equality and job security, because a number of these COVID-19 bonds that we see issued are, of course, on the topic of health. So what you would be assuming in terms of enlarging hospital capacity, creating vaccines, and the like. But the other side and the other elements that are strongly covered by these COVID-19 bonds are topics that really relate to this job security, training people, and making sure that all employees of corporates do have good economic standing. And they do think that is moving the needle because it's a topic, you know, that relates to inequality within countries, but also, of course, between countries. And it relates to very much how the workforce of a company is treated. And I think what the COVID-19 bonds and the corona virus crisis, in genera,l has exposed that on these topics. We do have quite some way still to go. So I do think that these topics now get a lot of prominence in the context of this crisis, but they will accompany us for quite a while to come.  

    Keesa Schreane [00:05:00] So you mentioned a really good point - the social aspect. And I'm just wondering if we take a look at where we are now and where we expect to be by 2020, based on phenomena we've seen previously. What kind of difference moving forward do you expect? In terms of worker employee treatment, as you just mentioned. And then in terms of the COVID piece and maybe Federico, you might want to chime in on this. How do you think this will last and continue as relates to us other countries continuing to create these sorts of bonds and these sorts of financial tools? We know this is not going to be the last pandemic that we see. How will we see this persisting?  

    Viola Lutz [00:05:42] Yeah, absolutely. I think this is a very good question. I mean, taking one step back, one element that I think I would highlight in the context of the COVID-19 bonds is that yet again, the sustainability bond market has shown that it has the ability to be quite creative and adaptive. And I think COVID-19 bonds have shown that the sustainability bond markets can address emerging issues based on this ability. Well, I mean, there's always a little element of hope certainly mixed into this. But what I hope to see, just practically speaking in terms of statistics, I was curious about the very same question myself. So we did a couple of analysis.  

    Viola Lutz [00:06:29] We have, as a corporate rating, provider, ISS ESG data on what are, for example, and policies from corporates on employment security and the types of employment. So that means part-time versus full time or only temporary contracts. And on topics like training and education. And a whopping majority of corporates do have training and education policies that we would consider poor or at the very best medium. So I think once this type of problems are exposed, I certainly would hope that corporates continue to address that. And to briefly also make the link to climate change and green topics in that context, I think social topics have also gained prominence when you speak about climate change. And the keyword to look out for in this context is the just transition. Andtraining and education will be very much key to all the companies out there that are not aligned with the climate target that will need to change - what products and services they bring out to the market and the way they operate. So I think training, education is very much key in the context of COVID. But I think we will also see this "S" component" continiue to be of relevance in the climate discussion to come.  

    Keesa Schreane [00:07:49] So the "S" component will continue to be relevant for us in the future. What do you say, Frederico and Chris, about the financial component? Do you see that we are starting a trend now where we are responding to pandemics, using financial tools in a way that we haven't before? How do you see this continuing to the future?  

    Federic Pezzolato [00:08:11] Well,  thanks for the question. I think that we see the experience that we are having with COVID-19 bonds is something I sort of a bridge that has been offered by the different market players to the needs and to the challenges of this pandemic. As as we all say. Clearly, the market has demonstrated to be really creative and flexible, also to accept new formats. And you think about new instruments to tackle this emergency. What we are seeing with talking with different financial institutions that are interested in issuing COVID-19 bonds is there's a long tail of this activity also in the future. Probably we won't have, you know, more bonds that are strictly related to the pandemic itself. But we still need to adapt our systems to be more resilient, adapt our business models in order to recover the conditions that we had in the past, before the pandemic. And so we see more and more issuances aligned with the guidelines that have been recently updated. I'm thinking about the social bond principles, for instance, that have been recently released. Investors have demonstrated to be flexible in welcoming these new tools. In the beginning, we didn't see many issuances that were built against the recognized standard. Now we are seeing more and more issuances that have been structured in a way that is more familiar for investors. So I think that we'll see more insurances like that in the coming months and probably coming in the coming years, because we have we are facing really challenges that are totally unexpected for four hours before the pandemic.  

    Keesa Schreane [00:10:25] And what about tracking the proceeds they're reporting on the social impact? Should the issuers look at a second party opinion? What are other elements that really make a good COVID-19 bond or a good social bond, what's the formula for that? 

    Chris Wigley [00:10:40] If I could just chip in here. I think there are two interesting trends. The first is that as the corporate crisis developed, we did see issuers rushed to the market with COVID-19 bonds, but it didn't necessarily give them time to get their full frameworks in place. So we saw a lot of what we call general corporate purpose COVID-19 bonds issued. But then as time has gone on and investors have been asking more questions with regards to these proceeds, we've seen more COVID-19 response bonds come to market that comply with standards. And these are the standards of the social bond principles and the sustainability bond guidance, too. So we're seeing higher quality COVID response bonds come to market now.  

    Chris Wigley [00:11:29] And there are two key aspects of these bonds to highlight. So social bonds or sustainability bonds, they must actually disclose the use of proceeds. And additionally, the issuer has to undertake to report on a regular basis, normally annually. So investors get additional information here, not just on how their money is going to be used, but also increasingly impact metrics, too. So that's one interesting trend to identify. And that's the increasing quality of the COVID-19 bonds.  

    Chris Wigley [00:12:08] And the other interesting trend is that, as mentioned at the beginning, we've seen a lot of issuance indeed with a 40 or 50 issuers and just three months or so. But we can expect more social reforms to come to the market to meet the challenge of COVID-19. So, for example, in Europe, the European Stability Mechanism has said that they will issue social bonds and they're a significant issuer. Additionally, foundations in the US, such as the Ford Foundation, have said that they're going to issue social bonds so that they can increase their payouts in this time of crisis; And certainly also banks who have been very much involved in extending loans to other needs. They have said that they are going to issue bonds as well. BBVA, for example, in Europe, one of the first and Bank of America, they've issued also a response bond so we can look forward to a significant amount of new issuance going forward.  

    Viola Lutz [00:13:11] Absolutely, maybe to complement what Chris said, I strongly agree with all the points made and I think specifically in terms of the transparency of the market, there is a certain, I would say, acceptance from investors or the market of the fact that a lot of the issuances related to COVID 19 have been relatively fast to the market. And how you can deal with that in terms of transparency. Well, we certainly do see emerging is that, for example, as Chris said, there is still a commitment, a clear commitment, to the social or the side sustainability bond principles. The other element that we increasingly see, and I think that is key for maintaining the high trustworthiness and accountability of the market that the sustainability market has quite strongly worked for over the past years. And that is to say, OK, I have to rush to the market, I need to be fast. This is what I can provide at the time of issuance, but I am committing at the time of issuance to an external review. So to a second part, your opinion as soon as possible after the issuance. And I think that is key because what, of course, we need to reply to the Coronavirus crisis in a very timely manner. But at the same time, it's important to protect this nascent market and ensuring trustworthiness. And how that can be done is when you look into how issuers can report on their own issuances, of course, is yes to adhere to the social or sustainability bond principles, but then also to be quite specific as to how they link the use of proceeds categories. So how they are spending the money that they get via the bond to their response to cover 19. So to clearly outline why are you calling it a coup with 19 bonds? What is your rationale? What other activities that you're financing? And for example, to also put that into the context of a national response plan as applicable to you. For example, if you're, based in Germany, or in France, etc., but to simply link it to whatever relevant legislation there is around the COVID-19 response to really substantiate your claim of having a contribution on these topics.  

    Keesa Schreane [00:15:25] So that's great Viola, we talk about understanding how the money's been used. There's a transparency element. Then we talk about linking it to legislation, having a response plan in place. If we had to give the top three qualifications, if you will, the process, if there is interest in qualifying for a COVID-19 bond to be the issue,  what would be the top three qualifications that we should look for?  

    Viola Lutz [00:15:52] I would certainly say 1) be very clear on your use of proceeds - what is your financing and be explicit on your link. 2) Adhere to the sustainability bond principle principles or the social bond principles and 3) get an external vote verification to really show that you mean it and that your credentials are verified.  

    [00:16:12] Excellent. And we will end it there. Thank you so very much. Chris Wigley, Viola Lutts, and Federico Pezzolatto. We really appreciate your time today.