Demanding social bonds in pandemic

This increase has been driven by the adoption of environmental, social and governance (ESG) factors by investment managers when assessing their investment portfolios.

Globally, investment managers who have signed up to the UN Principles for Responsible Investment (PRI) increased by 20 per cent in the year ended March 31, 2020, from $US86.3 trillion to $US103.4 trillion of assets under management; 91 per cent of these investment managers reported incorporating these factors into their fixed income investments in 2020.

In New Zealand, the Responsible Investment Benchmark Report 2020 shows the local responsible investment market was worth $NZ153.5 billion in 2019. This represents 52 per cent of the estimated $NZ296 billion of total professionally managed assets in New Zealand.

The report, issued by the Responsible Investment Association Australasia (RIAA), also found impact investing has grown rapidly, from $NZ358 million in 2018 to $NZ4.74 billion in 2019. Green, Social and Sustainability (GSS) Bonds account for 88 per cent of products using this approach.

The COVID-19 pandemic has highlighted the urgency of dealing with social issues like inequality and poverty, and reminded both issuers and investors of the opportunities for social bonds.

A landmark issuance occurred in late October when the European Commission issued a 17 billion-euro social bond under its newly established Support to mitigate Unemployment Risks in Emergency (SURE) Bond Programme.

The bond, which was 17 times oversubscribed, will help fund short-time work schemes, allowing businesses in economic difficulty to reduce employee hours whilst still employing them full-time.

The proceeds will also assist with health-related measures in the workplace.

The bond is part of the EU's 750 billion Euro "Next Generation EU" recovery fund launched in July, which aims to support sustainable recovery from the pandemic. There are two key focuses: keeping people in jobs and improving access to essential services such as healthcare and training.

Social bonds in the NZ market

An example of the potential in the New Zealand market is the Wellbeing Bonds issued by government housing provider Kāinga Ora to fund investment in new or upgraded sustainable social housing.

In total $NZ4.1 billion of the bonds have been issued, with ANZ acting as joint lead manager for $NZ3.6 billion of those.

The Wellbeing Bonds are helping Kāinga Ora further embed environmental and social considerations across its core activities and opens opportunities for investors in New Zealand and globally to access sustainability focused assets.

There are strong investment opportunities in social and affordable housing, which enable agencies such as Kāinga Ora to deliver high-quality, healthy and sustainable housing, while aligning to the government's commitments to international accords, such as the Paris Agreement and the UN's Sustainable Development Goals.

While issuers such as Kāinga Ora can raise large amounts through social bonds, relatively small sums can also be raised for tailored projects.

An example of a smaller transaction is the G-Fund Social Investment Bond — a $NZ6 million bond that provides six years of funding for the Genesis Youth Trust. The Trust works with at-risk youth and their families; combining social work, youth mentoring, family therapy and counselling services to promote positive lifestyle changes.

The future of social bonds

We believe the growth in popularity of social bonds will continue after the impact of the pandemic fades, due in part to the increased awareness we are seeing of the social issues caused by factors such as inadequate housing and poverty.

The pandemic has had a massive impact on people's lives — both professionally and personally.

There are many unanswered questions about how this will ultimately affect energy demand, government policy and commercial investment around infrastructure and commercial development. But it is clear many people are rethinking long-held economic, business and social models.

And of course, even before the pandemic arrived, we were seeing the growth in the popularity of impact investing. Increasingly institutional and individual investors are seeking investments that provide not only better risk-adjusted returns but also help create a more sustainable economy with positive societal and economic impacts for everyone.

Even after the world has eradicated COVID-19, or learned to live with it, nothing will be the same again. But as well as setbacks, there will be new ways of doing business that will endure and thrive in the new normal.

Investment in solving society's most challenging needs is an example.

COVID-19 set the scene for this asset class to demonstrate its relevance, and emerge — finally — as a mainstream solution to a variety of social and investor needs.

Dean Spicer is New Zealand Head of Sustainable Finance at ANZ

This article was first published in New Zealand Herald and shared on ANZ News NZ