Analysts in the sustainable investment sector say that the market must be on the alert for “social washing”, in which issuers argue that the proceeds will go to worthy causes but the money will end up elsewhere.
Since the coronavirus pandemic shocked global markets, companies and governments have issued tens of billions of dollars in special bonds, including around 60 billion euros only in March and April, according to Axa Investment Managers.
Many were classified as social bonds – part of a distinct market based on environmental, social and governance principles – while others were billed as conventional bonds intended to finance spending programs or strengthen budgets during the crisis.
The flurry of the issue gave social bonds an edge over more consolidated green bonds within the growing ESG sector. Green bond issuance declined in the first half of 2020, while $ 50 billion of social bonds were sold – more than double the entire 2019, according to S&P Global data.
But the social segment of the market is at an early stage of its development, analysts say, and is light on the rules on how to structure products and measure results.
New York-based S&P Global warned this month of social washing by paralleling the “green wash” allegations that have haunted many green notional bond issuers in recent years. “[Social] the benefits are often more qualitative than quantitative, “said Lori Shapiro, a sustainable finance analyst at the rating agency.
“With the green bond market, in essence it took 12 years to get to the point where everyone has good clarity on what is green, what is good and what is bad,” said Yo Takatsuki, head of research ESG and active ownership of Axa IM. “On social networks, we didn’t have that level of debate.”
An industry standard for social bonds is a set of principles developed by the Zurich-based International Capital Market Association, which requires issuers to identify specific projects with social benefits and then track and report how money is used.
But compliance with the guidelines is optional and details are self-selected, notes Tim Conduit, partner of the international capital markets group of the law firm Allen & Overy. As long as an issuer uses the money as he would have said, the only remedy for an investor who believes that the company’s reporting is poor or who disapproves of specific projects in which the money is invested is to sell the bond.
“If an issuer has given himself room to maneuver, then you have to assume he will use it,” said Conduit.
Pharmacist Pfizer, who issued $ 1.25 billion in 10-year bonds in March, said he wanted to use the money to finance some “eligible projects” – the company’s chosen sustainability initiatives. But the investor prospect said that, prior to the allocation, the funds could be temporarily used for “short-term investments” or “to repay other loans”.
“There is no guarantee that these net proceeds will be paid in whole or in part for those eligible projects,” he added.
Pfizer declined to comment on this article.
The objectives of Covid-19 bonds – social or conventional – tend to vary, with some issuers allocating funds for immediate relief and the purchase of medical equipment, while others aim to support longer-term recoveries.
Issuers included supranational bodies such as the European Investment Bank, governments such as Indonesia and companies including the Spanish bank BBVA and Bank of America. While some broadcasters said they would finance the funds and outline strict criteria on how to use the money, others gave themselves more flexibility.
Takatsuki said Axa IM considered 25 Covid-19 bonds for potential investments and rejected 10 bonds. A common problem with bonds – a mixture of corporate, sovereign and development agency debt – was vagueness, he said. Takatsuki. “We didn’t think there was enough information or guarantees,” he said.
Numerous bonds, he added, made it possible to use the proceeds for general purposes at the end of the crisis. An obligation allowed part of the money to be used for non-pandemic purposes.
In February, Chinese regulators said they would speed up the process of approving “virus check” obligations if only 10% of the money raised had been spent on helping fight the pandemic. A glass maker who took advantage of the system described it as a “windfall” of economic capital.
When it comes to social bonds, analysts hope that standards should improve as issuance increases, as is the case with green bonds. Until then, they say, investors may have to believe that the money will be put to socially useful ends.
“It is not very easy for our analysts to track the proceeds until a company reports [how they have been spent]”Said Lan Wu, a credit fund manager in euros at Legal & General Investment Management.
Again, it can be difficult to independently verify what the broadcaster claimed, he added: “There is not enough transparency or data.”