Covid-19 bonds drive ‘sustainable’ debt as green issuance fades

Heavy issuance of bonds aimed at tackling the effects of the pandemic could push the size of the “sustainable” debt market to a new record this year, according to Moody’s, even as the frenzy for green bonds cools.

The volume of newly issued debt based on environmental, social and governance principles could reach $375bn this year, up by more than $50bn from last year, the rating agency forecast on Monday. 

But that growth masks a slowdown in the growth of green bonds, the most mature segment of the so-called ESG market. Moody’s on Monday reiterated that it thought $175bn to $225bn in new green bonds would be issued this year, down from a previous estimate of $300bn and a decline from the $258bn sold to investors last year.

“There is no doubt the pandemic triggered a shift in demand for social bonds,” said Marie Fromaget, an analyst at AXA Investment Managers. “Covid-19 bonds — both general purpose and use-of-proceeds, issued under the sustainability/social bond format — are on the right track to outpace green bonds in 2020.”

In the second quarter of the year, a record $33bn in social bonds were sold to fund managers, almost double the $17bn issued in total in 2019. A record $19.1bn in sustainability bonds were also issued in the second quarter, compared with $48bn in total last year, according to Moody’s.

Examples include a €1bn, five-year social bond to finance public hospitals affected by the pandemic, issued by French public-sector lender Caffil, and a $4.25bn three-year bond from the Inter-American Development Bank to help countries prepare and respond to Covid-19 and its impact.

Matthew Kuchtyak, an analyst at Moody’s Investors Service, said that combined social and sustainability bond volumes could now total $150bn for the year — “as coronavirus pandemic response efforts and heightened awareness of social issues related to healthcare and inequality continue to support issuance”.

As well as a surge in social and sustainability bonds linked to specific coronavirus support measures, this year has brought a flurry of conventionally structured pandemic-related bonds that issuers said would help bolster existing business lines. In June, in response to the uptick in sustainable bond issuance, some analysts called for the market to be alert to “social washing” — where issuers claim that proceeds will go towards worthy causes, but the money ends up elsewhere.

Although green bond volumes rebounded to $47.8bn in the second quarter — a 26 per cent increase compared with the first three months of the year — they remained below their 2019 quarterly average of $65.5bn, according to Moody’s. Green bond issuance was likely to pick up again in the second half of the year, the agency predicted.

Even given its rapid growth this year, the sustainable bond market remains relatively small — accounting for about 5 per cent of the total global bond market.

But Moody’s said it expected environmental, social and governance risks to become increasingly important, underpinning the continued growth of the market.

“The pandemic will intensify the focus of companies, investors and other stakeholders on ESG factors, with scrutiny extending beyond public health crises to other potentially high-impact issues, such as climate change,” the agency said.