The pandemic has accelerated the issue of social impact bonds, which according to S&P and Aegon Am are destined to grow further in a market with decreasing volumes. Reason? The change of mentality: sustainable finance and ESG investments are the future.
The future of post Covid crisis investment is social impact bonds. S&P Global Ratings analysts are sure of this, according to which the exponential increase of this type of emissions led by the pandemic will certainly not stop with the end of the emergency. Quite the opposite: these bonds, a typical example of sustainable investments, are ready to emerge in 2020 as the fastest growing segment of ESG finance.
The importance of ESG criteria for investments is continuously growing
Since the beginning of the year, the issue of social bonds has more than quadrupled, as the S&P report certifies, the interest of issuers and investors seems to continue to increase and the effects of the coronavirus pandemic have accelerated the use of these ESG bonds, both by part of public and private subjects. A figure in stark contrast to the rest of the global fixed income market, for which US agency analysts are forecasting 9% drop in emissions in 2020.
Social impact bonds are finance projects that have an impact both financially and socially, with objectives such as improving food safety, access to education or health care, or that respect ESG criteria.
Social bonds have unexpectedly made their way into the fight against the virus as a tool to respond to the needs of consumers and communities increasingly aware of social issues. “Companies and financial institutions will become more active in the social impact bond market because the pandemic has accelerated the interest of private issuers in the social aspects,” assures S&P sustainable finance analyst Lori Shapiro.
An awareness that increases exponentially during the Covid crisis, so much so that according to Morgan Stanley data, more than $ 32 billion in social and sustainability bonds were issued just last April. Unimaginable record until recently.
And these are no longer just public subjects: the crisis is also pushing companies to allocate more resources to social policies. According to Bas NieuweWeme, CEO of Aegon Am, the lockdown has finally clarified how to evaluate companies on their skills in managing social problems. “Historically, the social element in the ESG sphere has always been the most difficult to determine, as it is based on qualitative measurements, with limited means to establish its effective performance – explains NieuweWeme – The impact of the coronavirus and changes in the way people must live and work today, however, has brought this factor, as never before, to the center of attention, thus allowing to outline real reference criteria and not based on simple policies or position statements”.
Social impact bonds will be the protagonists of sustainable finance in the post-crisis period
For the growth of investments in social impact bonds, according to S&P, disclosure of data and reporting will be increasingly important, in particular for concerns relating to “social washing” and any misrepresentations of the real social impact of the projects financed. And in this area, although significant steps have been taken towards standardization and transparency, problems persist and improvements have been slow, according to US experts.
Now we can refer to the behavior of companies during the crisis: are they providing their employees with sufficient equipment and adequate structures to carry out their work? Regarding the future remuneration of the boards of directors, have the companies shared the burden of the crisis or have they abandoned their employees and customers in these difficult moments? Just two examples, but very current and concrete.
“During the lockdown and in the return to normal phase, the importance given to employees’ physical and mental health, safety and well-being has increased. The role of investors today is to evaluate how companies have actually adapted practices and work environments to guarantee these aspects” concludes NieuweWeme. “More generally, in terms of markets and economy, the Covid crisis has nevertheless served as a catalyst for change. From an investment perspective, if there is something good that can come from this situation, it is precisely the fact that it has generated greater awareness of ESG issues”.