ADB backs greater use of social bonds

MANILA, Philippines — The Asian Development Bank (ADB) is pushing for the increased use of social bonds as an additional platform for governments to raise additional resources to recover from the pandemic.

In its report “Primer on Social Bonds and Recent Developments in Asia,” the Manila-based multilateral bank said harnessing the power of private capital to address urgent societal needs had become critical amid limitations in government resources.

“Social bonds, which raise funds to create social as well as financial value, are instruments with a vital role to play in spurring recovery from the coronavirus disease crisis as well as in supporting future socioeconomic progress,” the report said.

In the global bond market, such bonds fall under the term “ESG bonds,” short for environmental, social and governance bonds.

By early 2020, around 25 percent of money under professional management were aligned with ESG goals in addition to seeking financial returns.

In 2019, ESG bond issuance jumped to $330 billion, up by 33 percent from 2018, and outstanding ESG bonds passed the $1 trillion threshold in the middle of 2020.

While the ESG market was initially dominated by green bonds, social bonds have seen “exceptional growth” in 2020 because of pressing financing activities to arrest the fallout from the pandemic.

“This development is ushering in a new era of explosive growth for ESG-linked bonds on general and social bonds in general,” said the report.

ADB said economic and social needs in Developing Asia highlight the urgency of creating a robust social bond market in the region.

In December 2020, ADB forecasts that developing Asia’s gross domestic product would contract by 0.4 percent in 2020, the region’s weakest economic performance since 1961 because of the impact of the pandemic.

This is expected to be followed by a 6.8 percent expansion in 2021, which implies only a partial recovery, and with downside risks, rather than upside potential, prevailing.

The economic fallout from the crisis widens the funding gap needed to attain the Sustainable Development Goals in the region.

The report noted that social bond issuance in Asia has consistently lagged behind European issuance, but recent growth in the region has been significant.

In 2017, Asian social bond issuance comprised 12 percent of total global issuance, growing to 23 percent of the global total in 2020. Growth of the social bond market in Asia was closely linked to investor interest in COVID-19-linked bonds.

To a large extent, investor demand has been the driving force behind growth in the social bond market. Globally, funds that buy ESG bonds grew by about 12 percent during the first half of 2020.

ADB said the development of a strong social bond market in the region would serve economies well beyond the pandemic as it would help direct private capital to address long-standing social ills even as the crisis eases and a new normal emerges.

The bank said harnessing the contributions of governments, multilateral institutions and philantrophic organizations would be key to developing this bond market.

Another opportunity is for the Islamic finance market to step up its contribution to ESG-linked funding.

Gender lens investing can also help grow the social bond market by channeling investments toward the social and economic empowerment of women.