CORONAVIRUS: Christopher Wigley: The time has come for Social Bonds
What is the best way to mobilise the capital markets to deal with the health crisis?
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The International Financing Facility for Immunisation (IFFIM) issued the first Social Bond – a vaccine bond - in 2006.
It was pioneering in that, for the first time, the issuer disclosed the use of proceeds. This has become increasingly important in markets as millennials, Generation Z and institutional investors are seeking to know how their money is being used and its likely impact.
This unique issue became the template for the first Green Bond in 2007 and subsequent Social Bonds and Sustainability Bonds have seen exponential growth since.
Now with the coronavirus, the world is faced with a unique challenge, arguably the worst since Spanish flu in 1918, or more – interest rates have not been this low at the Bank of England for more than 300 years. The challenge may be considered in two parts – the public health and economic implications.
However, in both cases speed and scale are currently crucial. Following the financial crisis commencing in 2007, central banks have less ammunition than before and governments are now having to dig deep to address this challenge.
Arguably, the capital markets have the money needed to address this challenge; they just need to be allocated in the right way. Many investors – not only responsible investors – would like to contribute to this call and the Social Bond structure enables them to do this.
"In this way, private money as well as public money will be mobilised to address this challenge."
There are possibly four steps to addressing the challenge of coronavirus: Treat the sick and reduce the risk of infection, ensure business continuity as much as possible, deliver an effective vaccine and ensure economic recovery. Two steps are health related and two steps are related to the economy.
Perhaps the world needs a new agency such as the International Monetary Fund (IMF) to meet the challenge.
However, a new agency will take time to set up, establish a credit rating, etc. and time is of the essence.
An alternative may be to adapt IFFIM in some way. IFFIM is backed by the financial guarantees of the United Kingdom, France, the Netherlands, Sweden, Australia, etc. Rather than governments working independently, perhaps they can scale up their guarantees to IFFIM to help co-ordinate the fight. IFFIM would also need more internal resources. Funds raised by IFFIM may increase the amount of vaccine available – when ready - and speed the delivery. IFFIM may also need to be re-orientated in some way to countries in most need currently. However, crucially IFFIM already has the resources, history, skills and expertise to issue vaccine bonds in which the world could participate.
They may be like the old War Loans, but to fight another kind of war. Other financial backers may be invited to join such as the United States, India, etc. and subsequent vaccine bonds may not be just one mega issue in US dollars, there could be a whole series or tranches in different currencies.
How the funds raised are allocated would have to be decided in a sensible way of course.
Just as IFFIM might be used to address the health challenges, so a development bank might be adapted to address the economic challenges. The European Bank for Reconstruction and Development (EBRD) for example, has many financial members such as the United States, the EU, Japan, etc. and financial support could be scaled up by governments to address the global economic challenges of business continuity and economic recovery.
Again, a development bank like EBRD would also have to be re-orientated with a global focus. However, the EBRD has the resources, history, skills and expertise to issue Social Bonds to finance social infrastructure and economic support. Rather than there being one mega bond, there could be a whole series in different currencies and tranches.
In this way, private money as well as public money will be mobilised to address this challenge.
For governments, it would consist of guarantees rather than definite borrowing - governments will be mindful of their debt to GDP ratios over the next couple of years. Everyone has an interest in an initiative like this being successful: the virus is affecting everyone in some way.
Further, the Social Bond structure enables everyone to contribute – particularly through retail tranches or Solidarity Bonds - and to see how their money is being used, directed to the urgent priorities of the day, and to provide knowledge of its impact. Co-ordination in this way would also bring the countries of the world together to fight a common cause with real impact.
It may be argued that perhaps the virus will soon blow over during the summer or peak soon as it may have done in China. However, we cannot predict that developing countries will not be affected significantly further down the line, and indeed, that there will not be further virus pandemics. All this suggests that we need to adapt our institutions and use the Social Bond structure at hand to not just be concerned at the challenge facing us, but to deliver the solution.
Christopher Wigley is a specialist ESG Fixed Income Portfolio Manager, formerly with Mirova and Epworth Investment Management.