The COVID-19 pandemic has served as a catalyst for social bond issuance in 2020, as a way for investors and governments to address social divisions laid bare by the health crisis. And their use is expected to grow in the future and outlast the aftermath of coronavirus, according to market observers.

A total of 138 social bonds have been issued so far in 2020, raising over $163 billion, far more than the $13 billion raised in 2019, law firm Linklaters said in a Dec. 17 post, citing Refinitiv data. Such bonds appeal to the fast-growing base of socially concerned investors, Richard O'Callaghan, partner in the capital markets team of Linklaters, said in the statement.

In fact, bonds that address social themes have been the fastest growing sector of the labelled bonds market in the past year, Sarah Gordon, CEO of the U.K.-based nonprofit organization the Impact Investing Institute, told S&P Global Market Intelligence.

'Structural inequities'

The pandemic has exacerbated "many structural inequities" between richer and poorer nations and people, which has brought social justice issues to the forefront and increased interest in funding social projects that address rising unemployment, income inequality, and strains on housing, health care, and education systems, S&P Global Ratings said in a Nov. 10 report.

Various entities have responded by issuing coronavirus-linked social bonds. In March, the African Development Bank issued a $3 billion social bond aimed at alleviating the impact of COVID-19 on member countries. In July, Spain's CaixaBank SA issued a €1 billion bond aimed at helping small businesses in the country's most disadvantaged regions weather the crisis.

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S&P Global Ratings expects the global sustainable debt market to exceed $500 billion in 2020, partly driven by the rapid rise in social bond issuance.

"[W]hile the recent surge may have been precipitated by COVID-19, the appeal of social bonds as a sustainable finance instrument may endure long after its effects have subsided," it said in June.

Shifting attitudes

The Impact Investing Institute's Gordon said there has been an "unprecedented shift" toward sustainability factors being considered by investors, driven by changing regulations and evidence that sustainable investments outperform traditional ones.

This makes social and green bonds both an attractive investment and an invaluable risk-mitigation tool, while allowing investors to be on the front foot of a transition to a net-zero carbon economy, she said.

Addressing health and economic stress caused by the COVID-19 pandemic has been a principal driver of the dramatic surge in social bond issuance in 2020, but the sustainability-themed market also benefits from a secular change in finance, Mitch Reznick, head of research and sustainable fixed income at the international business of Federated Hermes, told S&P Global Market Intelligence.

The strong flows into sustainable funds this year, and the record €221 billion order book for the EU's €17 billion inaugural social bond, issued under the bloc's instrument for temporary Support to mitigate Unemployment Risk in an Emergency, or SURE, in October "speaks volumes about investors' increasing desire to simultaneously invest and support society," Reznick said in a written comment.

The most active social bond issuers were EU member states France and Luxembourg, raising $49.8 billion and $49.6 billion so far in 2020, Linklaters said. Each country accounts for roughly a third of the total global social bonds market.

French government agency Cades and unemployment insurance fund Unedic have been the biggest issuers of social bonds in 2020, with a combined issuance of $22 billion, Reuters reported Oct. 19, citing Refinitiv data. The funds were raised to support projects dealing with unemployment in France, Reuters said.

Japan, where 40 social bonds hit the market this year, topped the list for highest number of issuances, followed by the U.S. with 27 and France with 19, according to the data cited by the law firm.

Evolving market

The pandemic has also driven much financial innovation in 2020, Gordon said. Record amounts have flowed into sustainable investment funds, and the industry has "responded with creativity and imagination" by launching new vehicles and strategies to cater to investor demand, she said.

"We also see a growing trend in interlinking environmental and social goals," she said. "The U.K. government's 10 point Green Recovery Plan, for example, clearly sets a precedent by committing to creating green jobs and skills across the country alongside its commitment to transitioning to a net-zero carbon economy. In light of these developments as well as the expectation of further economic and social challenges caused by the ongoing pandemic, social bond issuance can be expected to rise further in 2021," she said.

The issuance of green bonds — whose proceeds fund environmentally friendly projects — also accelerated amid the pandemic, with the amount raised via the 680 issuances so far in 2020 reaching $227.6 billion and surpassing the already "record-breaking" 2019 level of $188.3 billion, Linklaters said.

"Green and social bonds have become arguably some of the most popular asset classes this year. The trend is set to continue as we begin to see more evolved variations of the product with the emergence of sustainability-linked bonds which go beyond the traditional use of proceeds model," Amrita Ahluwalia, capital markets lawyer at Linklaters, said in the statement.