Episode Transcript
Speaker 1 00:00:08 We are seeing a domino effect. What started as a health outbreak quickly became a global pandemic. We're experiencing historic market slides, s and p 500 saw one of its steepest declines in history between mid-February and March. But luckily, diverse solutions and concepts are emerging in response to this crisis. And one of them is social bonds. Today we're going to discuss social bonds and if they have the potential to perhaps save the economy. I'm here with Chris Wigley, fixed income specialist, AG portfolio Manager. Chris, welcome.
Speaker 2 00:00:50 Hi. Thank you very much indeed for inviting me.
Speaker 1 00:00:53 Great. So Chris, what are social bonds and how are they positioned to provide some help to our economy right now?
Speaker 2 00:01:02 So, uh, you may be familiar with, uh, green bonds and social bonds are the, the sister product to green bonds. It's very similar. Um, now there is a, a global, um, organization called the Green and Social Bond Principles who coordinate the growth of the green and social bond market. Uh, and essentially in defining a social bond, there are four pillars, um, but two are the most important. They are mandatory. So first of all, a social bond has to disclose the use of proceeds. So when you normally look at a conventional bond at the prospectus, there's normally a page on use of proceeds, and it'll just say for general corporate purposes. So investors don't know how the money is gonna be used. However, with a social bond, the social bond discloses how the money will be used. It could be, uh, for affordable housing, it could be for access to education, or it could be access to health as well.
Speaker 2 00:02:03 Um, now the other key pillar for, for social bonds is that, um, unlike conventional bonds, the issuer undertakes to report on a regular basis, it's normally, uh, annually, uh, and increasingly it includes impact reporting. So, uh, this really strikes a chord with investors today, whether they be millennials or Generation Z or institutional investors. Increasingly, investors want to know how their money is being used. They don't want it to necessarily go for things like ments or to tobacco, uh, and other issues like that. But they do want it to go to, uh, for example, green purposes to fight climate change or for social purposes as well. Uh, so there is a key opportunity now with this all.
Speaker 1 00:03:00 Okay, so that's a clear understanding of what they are, and thanks for putting that in context of green bonds. Now give us a bit more detail on how they can help us at this point. What should investors, institutional investors look to do, use these social bonds to really help them with their investing, um, in the middle of this crisis?
Speaker 2 00:03:22 So, uh, we have a unique, uh, position now. So something like 12 years after the financial crisis, uh, economies have been recovering, uh, but we're now faced with this pandemic. Uh, but unfortunately following the, uh, financial crisis, a lot of central banks are not in the strong position that they were 12 years ago. Uh, interest rates are very much lower than they were, uh, very close to zero in many economies. So it could be argued that the central banks are, are starting to, to run outta ammunition, which means that the markets, uh, and individuals have been turning to governments instead. Um, but as we know, um, from the financial crisis, again, three years after the financial crisis, we had these sovereign debt crisis that really affected countries like Portugal, uh, Italy, uh, Ireland, uh, Greece, uh, Spain, for example. So, um, countries have been very mindful of their debt to GDP ratios.
Speaker 2 00:04:29 So, which really leave everyone with a dilemma as to where do we turn next. Uh, and in actual actual fact, um, the global bond markets are in the region of about a hundred trillion in size. So the recent program from President Trump amounted to 2 trillion, which is a, uh, very s sizeable amount. Uh, but of course, uh, it's much smaller than the 100 trillion that's available in global bond markets. And similarly, there's about 70 trillion available in equity markets too. Now, the, the social bond product is a way of actually channeling those funds into projects that can really help us right now. Um, so as I say, the social fund product discloses the use of proceeds and that use of proceeds could be, for example, to fund, uh, vaccine programs or it can help with economic recovery as well.
Speaker 1 00:05:27 So, and could we discuss specifics? I mean, what countries are really, what countries and what super nationals are really working on this right now? Who's doing it well and what are they doing?
Speaker 2 00:05:39 So the, the social bond market is around about 14 years old now. First social bond was issued in 2006, uh, significantly by, uh, a subnational, uh, called IF, or the international financing facility for immunization. So this was a subnational backed by countries like Britain and France and Sweden and the Netherland, for example, uh, to actually fund a vaccine program in this case, um, uh, helping children in Africa. But the key thing is here and, and the expertise of issuing social bonds into the market to fund this program. And of course, we're faced with a very severe pandemic now. Um, so that's, um, uh, one element of the social bond market. As I say, it's about 40 years old. Uh, and there are other issuers of cons market as well. Uh, another example is the InterAmerican Development Bank. Uh, of course, AAA rated, uh, they've had a product for a number of years, uh, specifically they call it an or e and there stands for employment, uh, uh, youth and education. So you can see the sorts of projects there that, uh, the funds can be used for. And it's not just, um, these issuers. There are other issuers as well, for example, uh, I c who are part of the, the World Bank, also the European Bank for Reconstruction and Development, uh, and other subnationals too.
Speaker 1 00:07:16 Great. So, and I Oh, please, please,
Speaker 2 00:07:19 Uh, sorry. I was just gonna say that in total, uh, the size of the market is, uh, in the region of about, uh, uh, 50 billion or so and growing.
Speaker 1 00:07:29 Okay, great, great. I'm really curious, um, to talk a bit about the, the so-called the COVID 19 bonds. I know that the African Development Bank is participating in the Fight COVID 19 bond. I really would like to get your thoughts on, on what that consists of and if we see those types of bonds specific to this specific outbreak really emerging.
Speaker 2 00:07:51 Yes, this is, this is really interesting because, uh, we have, as we said earlier, a unique challenge and the SU national banks are arising to this challenge. So just in recent days, we've had news, uh, but, uh, banks are actually looking to launch, uh, and there is one, as you mentioned, the African Development Bank that was, uh, uh, came to market yesterday. Uh, so this was 3 billion in, it was a three year bond coupon money was specifically used to create conditions for economic, uh, recovery, uh, following the Covid-19 virus. Uh, it's to support, uh, uh, to finance countries, um, uh, with their, um, uh, business, uh, really against Covid-19. And similarly, it's not just the African Development Bank. Uh, we've also had news that development bank too bond, uh, again here, uh, it's probably gonna be a five year issue. And again, they, they're saying that this is going to help countries, um, uh, in Latin America and the Caribbean, with the challenges posed by the pandemics are rising to the occasion. It could be an sort of important source of funds, uh, going forward.
Speaker 1 00:09:21 And in terms of what the funds are deci are designed to do, and taking this one specifically, uh, fighting the most urgent needs in terms of medical equipment, drinking water, things of that nature. How can, how can people see the real effects, um, as well as institutional investors and individuals see the real effects of what can happen as a result of having these types of social bonds in the market? What is the end result?
Speaker 2 00:09:47 So, um, we can perhaps, um, look at the challenge facing us in, in four stages. So, so one is actually, uh, try, uh, treating, uh, people who are sick and trying to reduce the risk of infection. The second stage is, uh, business continuity. Uh, a third stage is to, uh, deliver a vaccine. And then a fourth stage is to, uh, deliver economic recovery. Uh, now the first stage, the most challenging we're hearing around the world, uh, is the, uh, provision of testing kits of masks, uh, of, uh, ventilators, uh, and of oxygen. And there's no reason in, in theory why social bonds shouldn't be able to fund, uh, those programs in some way. For example, helping, uh, factory repurpose themselves, uh, for this production. And this might actually call for some, uh, social bonds to be issued by corporate. Uh, another stage is, uh, business, uh, continuity.
Speaker 2 00:10:50 So here, um, subnational banks may be able to assist economies in, uh, continuing their economies while we go through, uh, this peak of infections. Uh, a third stage is delivering a vaccine, uh, at scale. And I mentioned earlier the international financing facility for immunization. Um, now as I say, they have experience in issuing, uh, social bonds or vaccine bonds to fund a program. What we're going to be faced with when a vaccine is eventually available is it needs to be insufficient size, and then it needs to be delivered to, uh, the population, uh, at speed. And it's possible that, uh, if may be able to scale up role in this respect. And then fourthly, we talked about economic recovery. This is very important. We're, uh, that, uh, purchasing managers indexes are plummeting. Uh, we've heard recently that Singapore's gdp, uh, had fallen, uh, more than 10%.
Speaker 2 00:11:54 Uh, the forecasts are for a significant decline in GDP amongst global economies. Some economists are talking about a deep recession, uh, or even a depression. So economic recovery is gonna be crucial. And here, I think, um, not only social bonds, but green bonds can play a key role in that economic recovery. So, for example, uh, green bonds can help in terms of green infrastructure. There is a need for more, uh, green transportation to be built. There's a need for more renewable energy in terms of solar park, uh, and, uh, uh, and wind farms, for example. And this is all called green growth, but it's also, social bonds can assist with social infrastructure as well, because, um, it's also going to be needed, uh, particularly in developing countries to have, um, the installation of, of sewers, um, greater access to drinking water, uh, better sanitation, for example. Uh, so these are projects that social bonds fund too. So in the economic recovery stage is a key role that can played by both social bonds and bonds.
Speaker 1 00:13:08 So Chris, we've talked about the transparency that social bonds provide. We also talked about, talked about what we've learned from the financial crisis that took place over a decade ago, and also what social bonds are delivering. We've talked about that and how they can support economic recovery with these very timely examples. What are the top three focus points that institutional investors should think about when considering if social bonds are the right, um, the right tool for them for their portfolio?
Speaker 2 00:13:41 Well, as, as you say, um, uh, some key elements are the transparency of social bonds, uh, and also the impact of social bonds as well. And these are the two additional things that social bonds provide, um, uh, compared to a conventional bond. Um, social bonds, uh, should yield the same as a conventional bond from the same issuer because the credit risk is the same, but the investor, uh, gets something additional. That's the transparency and the impact. So it's a, a win for investors. We also have to bear mind, it's a win, uh, for issuers as well, because by issuing social bonds, they're also increasing their investor base. Um, but it's also, uh, a win in the fight against this pandemic. So we could say it's a, a win-win win situation. But, uh, in addition to all this, um, what I would note is that, um, uh, going into this crisis, uh, credit spreads were relatively tight in the region of about, uh, a hundred basis points, uh, for the US dollar corporates.
Speaker 2 00:14:51 And since then they've widened out significantly to about 400 basis points. Uh, and that's the widest state been since the financial crisis. So it's possible to say that relatively speaking, uh, credit, uh, or corporate bonds, um, and in this case, social bonds, uh, offer more value than previously. Uh, but as a second point is that during this crisis, uh, economists are forecasting unfortunately that there will be earnings downgrades, uh, there will be credit downgrades, and unfortunately there will be some credit defaults as well. So, uh, the risk out there is forecast to increase. Uh, now uniquely for the social bond markets, very much dominated by subnational banks that are AAA rated and anda rated. Uh, and so the credit risk is lower there. So, um, we can say that, uh, social forms issued by Subnationals, um, um, may said to be relatively, uh, attractive in terms of credit protection. Uh, third point we can highlight here is that, uh, with the forecast scenario of a deep recession or depression, uh, there may well be more, uh, volatility in risk assets. Uh, and that means that, uh, asset classes such as bonds, including social bonds, uh, may play a key role in investors' portfolios in terms of, uh, lower volatility or safe haven, uh, in financial markets, in this time of uncertainty.
Speaker 1 00:16:35 All very good points, lower credit risk, potential, lower volatility. Chris, thank you so much for your insight on social bonds, and thank you for joining us today.
Speaker 2 00:16:44 Thank you very much indeed. For the invitation,
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