Coronavirus and calls for equality have paved the way for the rise of sustainable bonds, of interest to corporate issuers and investors especially because of their social impact component.
Both the pandemic and the social protests that started in the U.S. and spread around the world have revealed hard truths about racial injustice, social inequality and environmental issues. Many companies have responded, offering to support relief for hard-hit and vulnerable populations, as well as environmental, social and governance (ESG) initiatives—and getting investors involved, as well, through the issuance of billions of dollars in sustainability bonds.
Underlying that altruism is the growing evidence that the businesses and investors who take sustainability into account end up with less risk and better returns. “There’s the perception that companies with favorable ESG characteristics will outperform, especially in an environment with a more heightened focus on tail risk,” says Melissa James, Managing Director and Vice Chairman of Global Capital Markets at Morgan Stanley. “COVID-19 has made corporates pay more attention to the ‘S’ component of the ESG equation and social issues such as continuity planning, health benefits, managing supply-chain disruptions and equitable access to resources and opportunities.”
Companies, such as U.S.-based Alphabet and Pfizer and Cassa Depositi e Prestiti of Italy, for example, have issued more than $8 billion in such bonds, underwritten by Morgan Stanley.
Data show that during this pandemic, companies with higher ESG rankings had stronger financial performance,1 one reason why many corporates and investors increasingly view sustainability as a critical performance factor. Issuing bonds that fund initiatives that aim to democratize access to health care, provide financial support to small businesses or reduce carbon emissions is one way companies are showing their commitment to ESG issues that can also be perceived as business risks or opportunities. Offering debt has gained popularity in recent years, especially among corporations, which increased their share of the sustainability bond market to 25% in 2019 from 5.9% the year prior.2 Issuance volume surged to $48 billion last year, compared to $16 billion in 2018.3
To a large extent, the coronavirus pandemic has paved the way for a rise in sustainable bond offerings, especially of interest to issuers and investors because of their social impact component. In April, new sustainability bonds totaled $19.4 billion, marking the first calendar month that this type of debt issuance surpassed offerings of green bonds, which totaled $16.8 billion.4 Traditionally, green bonds have been a more popular asset, as organizations have committed to climate-change adaptation and mitigation.
Corporations aren’t the only types of issuers focusing on social impact: Earlier this year, large private foundations such as the Ford Foundation, Doris Duke Charitable Foundation and the MacArthur Foundation offered social bonds, which they’re using for the first time to increase grant-making to smaller nonprofits struggling because of the pandemic.
Partially fueling demand for bonds that fund social or environmental projects is the growing popularity of sustainable investing among asset owners, who perceive the potential for attractive financial performance alongside positive impact on the planet or society, just as regulations are driving greater disclosures on ESG factors.
Performance data compiled during the pandemic has only strengthened the case for sustainable investing. For businesses ranked by ESG scores, those in the top 20% performed better than the broader market during the second quarter of 2020,5 while bond spreads of the lowest ESG-rated companies widened more than those of higher-ranked peers in March through June, compared to before the pandemic.6
As more investors take note of such outperformance, corporate issuers have begun marketing their sustainable and social bonds as a way for portfolio managers to target social causes and earn yields that are higher than what long-term government bonds offer.
In August, for example, Alphabet issued the largest-ever corporate sustainable financing with a $5.75 billion issuance of sustainability bonds as part of an overall $10 billion offering, underwritten by Morgan Stanley. The use of proceeds ranged from projects such as energy efficiency and green buildings to social projects including affordable housing, commitment to racial equality and support for small businesses during COVID-19.7
In March, Pfizer issued a $1.25 billion sustainability bond, underwritten by Morgan Stanley, that was the first of its kind for any biopharmaceutical company. Proceeds will support increased patient access to Pfizer’s medicines and vaccines, especially among underserved populations, the mitigation of the drug maker’s climate impact and reduction of waste from manufacturing its medicines and vaccines.8 In April, Italian investment bank CDP issued a €1 billion social bond, for which Morgan Stanley served as joint lead manager and joint book runner, to help local businesses access credit and public administrations strengthen capacity for healthcare services.9
“The COVID-19 pandemic and social equality movements have shined a light on the breadth of potential risks companies are facing, and they’ll cause ESG to accelerate,” James says. “There will be more companies inclined to avail themselves of sustainability bond issuances, and we’re convinced that social factors will continue to be perceived as material risk.”