The explosion of issuance of social bonds in the wake of the Covid-19 pandemic has highlighted the potential of these flexible instruments.
Speaking at Environmental Finance's ESG in Fixed Income Europe 2020 virtual conference, experts from Japanese bank Nomura, the European Investment Bank and World Bank provided their insights into market developments in Japan and Europe, and what can be expected in the future.
Jarek Olszowka, head of sustainable financing at Nomura, said that the social challenge of ageing populations is one area in which Japan has been, necessarily, at the forefront.
Olszowka explained that globally the average proportion of people who are 65 years old or more is 8% and for developed countries this rises to around 17%. For Japan, however, he explains the problem is more "acute" with 28% of all society 65 or more. What is more, it is estimated that by 2050 almost two-fifths of the Japanese population will be over 65.
Consequently, Japanese investor interest in social bonds that look to respond to this ageing challenge is growing. For example, medical technology firms in Japan that are focusing on responding to this challenge have attracted market interest, said Olszowka.
"I think this is one mega trend which Japan is at the forefront, and I think this is an area where Europe could potentially look to Japan for pointers, or look at how the market is developing," he said.
Nomura Asset Management senior portfolio manager Jason Mortimer emphasised how some innovative social bonds in Japan tackling problems associated with an ageing population show how multi-dimensional the benefits from social bonds can be.
"One social bond funded elderly care homes," he said. "Interestingly, when you do that and you free up family members who have been taking care of their elderly relatives, then they can go back to work. A lot of them are women, so this is also tackling some inequalities. Also, there is the potential that economic growth can improve when you tackle these types of issues."
"I think that that's a great way that the social bond market is really showing how multi-dimensional and how ultimately growth-positive it can be when these types of issues are raised and addressed by issuers and investors."
World Bank capital markets and investments lead financial officer Yoshiyuki Arima said there were some social bond themes which, although just starting in Europe, were highly prized by Japanese investors – in particular, food loss and waste, and nutrition. These are areas in which the Japanese government is keen to take a global lead.
Arima said that the World Bank begun its food loss and waste bonds in Europe, but "immediately" Japanese institutional investors "aggressively bought" the social bonds from the World Bank in this area. Now, around 80% of the World Bank's total food loss and waste transactions are purchased by Japanese institutional investors.
European Investment Bank (EIB) sustainability funding head Aldo Romani said the explosion of social bonds in the wake of the pandemic has focused attention on the so-called 'grey rhino' threats facing global society. In contrast to the rare and unforeseen 'black swan' events, 'grey rhino' threats are those that have an enormous impact but are highly probable yet neglected.
Romani said following the pandemic these 'grey rhino' events are now very much recognised, which he considers a "very positive step forward". In particular, he believes it will help the EU as it looks to add social criteria to the environmental criteria of its closely-watched EU Taxonomy by the end of 2021.
"This is a substantial step forward, because all the advantages that are derived from this enabling framework that Europe has created – and is now increasingly taken as reference internationally – are being extended, with the same logic and with the same principles, to other areas that have been neglected thus far."
Romani said the EIB extended use of proceeds allocation under its Sustainability Awareness Bond (SAB) programme earlier this year to include the area of health financing pursued as part of its response to the Covid-19 crisis. Previously, health financing of this kind was not included in its SAB programme.
Actions such as that of the EIB and EU will "help this market segment to get organised as it should be," he said.
Olszowka said a key shift in the future will be the growth in 'real economy' issuers – that is, non-financial corporations – of social bonds, providing diversification to the current very high-credit quality, agency-led market at present.
"When we speak to investors – not only in Japan but globally – one of the main asks is to have more real economy issuers," he said. "It's great that the EIBs and the World Banks of the world are leading the charge on this, and have been for over a decade now, but I think this will be the next step."
"I think now investors are becoming more familiar with what social bonds are, which 24 months ago I would say was not the case," he said. "Social bonds were just such a small subclass of the whole market. I think this is where the pandemic has really changed things."
Olszowka said social bonds are now on their radar of your "typical green bond buyer"– they are either now buying them or very familiar with them. "I think that is a permanent change from the last few months," he said.
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