Green bonds have become a staple of green finance, with a market fast maturing, especially in Europe. But the pandemic and shifts in thinking have put new velocity behind social bonds. Again Europe is leading. Caution being, these are early days.

The issuance of social bonds has surged over the last few months as markets respond to the early impact of COVID-19. The market has topped €66 billion, up by 43 per cent in a three-month period, according to figures released by NN Investment Partners yesterday.

UBS managers agree that the emphasis is shifting from E to S in ESG, at least in the short term. In a call yesterday, the world’s largest wealth manager said it has seen significant new net inflows into sustainable portfolios, and a clear elevation of social issues in the minds of investors since the outbreak. The firm indicated that around 90 per cent of net new mandates were going into sustainable portfolios. Michael Baldinger, global head of sustainable and impact investing for UBS AM, said the biggest change has been among “large asset owners changing their views about allocation”, which saw $4.5 billion net new monies in the first quarter. "There is much more material risk prominence now attached to the S than previously," the group said.

Dutch-based asset manager NN IP agrees that the crisis has triggered ESG rebalancing in the sustainable fixed income space and said it expects to see sovereign green bond issuance rising later this year. There are signs that the social bonds market will mature more quickly now as well.

“The COVID-19 pandemic has clearly brought the social bond market to the next level. It is now in a phase very similar to that of the green bond market in 2013 and 2014,” said Jovita Razauskaite, green bonds portfolio manager at NN IP. Despite the surge, it is still small and dominated by a few participants.

It will need to attract a broader range of participants and issuer types to grow and diversify, Razauskaite said. “As our green bond strategies run purely green portfolios, we do not hold social bonds,” she added.

Global agencies, governments and financial institutions, such as the European Investment Bank, make up about 80 per cent of the current market, and most social bonds are euro-denominated, with a few issuances in US dollars and Japanese yen. They have typically been used to finance social housing projects and create jobs in deprived regions.

But the pandemic has supercharged interest in using social bonds for a variety of support projects, especially helping small and medium-size businesses through the worst of the business shocks across Europe.

Since early April, around €20 billion has been raised, mainly in France, Spain, Italy, the Netherlands, and also in Japan and Africa, according to NN IP data. In mid-May, the French unemployment insurance agency Unédic launched Europe’s largest social bond to date in the crisis worth €4 billion.

Razauskaite says the market is ripe for corporates to step in. Those wishing to address social issues across their businesses and supply chains could now use social bonds, she said. As liquidity increases, they will be “a viable option for investors”.

The biggest market challenge “will be creating a more standardised impact-reporting format, which will improve transparency and enhance its credibility and growth potential,” she added.

As with ESG, the market has attracted plenty of "social washing" claims. In the absence of agreed standards, it is hard for investors to track how money raised through social bonds is being used. The rapid rise of COVID-19 bonds is a case in point. Some of them are vague instruments operating more on good faith than effective disclosure rules and societal benefits, analysts have argued.

Clear guidance has emerged from the Zurich-based International Capital Market Association (ICMA) through its Social Bond Principles offering disclosure and reporting guidelines for issuers to increase capital allocation. The group revised the principles last month on the surge in social bond interest.

"As in all areas of the market for sustainable finance, we are wary of issues that offer less transparency in terms of use of proceeds, or whose structures are likely to raise questions,” portfolio lead at NN IP Bram Bos acknowledged.

Past issuers have either entered the market with bullet issues, the case in France and Belgium, or chosen to build a yield curve by issuing green bonds with different maturities and coupons, where Poland is an example. These are the preferred structures. A green yield curve signals that a country is committed to a fully-fledged green bond market, Bos said. Bullet bonds only pay out at maturity.

Although the global market for green bonds is marginally down for the first half of 2020, it has doubled since 2019, according to figures from S&P Global. UBS also sees the market firing up. On yesterday's call, its bond specialist said that green issuances in June reached $17.8 billion versus $8.9 billion in social bonds, but the market for social bonds is up more than 250 per cent year on. Samantha Sutcliffe, head of green bonds for the Swiss manager, said the newly launched ICMA principles have helped provide "that extra comfort for issuers to come to market." She said that banks and corporates were showing far more interest.