Since COVID-19 has overturned global markets, companies and governments have rushed to issue tens of billions of dollars worth of special bonds that have been labelled as "COVID bonds", "social bonds" and "sustainability bonds", the proceeds of which are earmarked to address impacts of the COVID-19 outbreak.
The success of these special bonds seem to have come at the expense of green bonds that were expected to have another strong year this year after their uptake during 2019 and as a result green bonds have been eclipsed by such special bonds for the first time.
This uptake in social bonds comes with issues such as understanding what the use of proceeds of these new classes of bonds will be as the usage of proceeds are potentially difficult to quantify, as they are more qualitative than quantitative. For example, some funds are being designated to purchase medical equipment, while others are earmarked to longer-term recoveries that may be too vague.
Another potential issue is the vulnerability of these bonds to "social washing", where issuers can claim that proceeds will go towards specific causes but the funds end up elsewhere, as it is difficult for proceeds to be tracked by investors due to lack of transparency or ongoing disclosure from the issuer. However, as is the case with green bonds, the sole solution for any frustration of lack of transparency on the use of proceeds of these bonds is for the investor to divest from their investment.
In any case, issuers should ensure that their social bonds align with the ICMA's Social Bond Principles as additional best-practice guidelines in this market evolves.
The flurry of issuance has given social bonds an edge over more established green bonds within the growing ESG sector. Green bond issuance dropped in the first half of 2020 while $50bn of social bonds were sold — more than double the whole of 2019, according to data from S&P Global.