COVID-19 helps drive record-level ESG bond issuance

Global bond issuance linked to sustainability causes saw the kind of spike in April that is being attributed to a near-perfect supply and demand balance in terms of a debt market increasingly tuned in to social, environmental and governance issues.

According to Morgan Stanley, the $48.5 billion worth of ESG bonds issued last month was more than double the issuance of March and reflects a 272% increase over the issuance volume of April 2019.

Considering the overall size of the $50 trillion global bond market, which is more than three times the size of the global equity market, the sudden spike in ESG issuance has to be kept in perspective for coming off a relatively small base.

But the growth this year is still a significant sign of the times.

“These numbers will continue to grow because there are investors looking for these kinds of bonds,” said Ronald Bernardi, president and chief executive of Bernardi Securities.

Morgan Stanley’s report separates the general ESG bonds into sustainability, social and green, and cites an increase in sustainability-linked debt as connected to issuance related to fighting COVID-19.

The sub-category of social bonds, for example, represented $12.4 billion of April’s ESG issuance, which compares to zero social bond issuance in April 2019.

Social bonds have a use of proceeds linked to projects that address global social challenges, such as the coronavirus pandemic.

“With the COVID-19 pandemic, we are seeing increased demand for green bonds and impact bonds from our client base,” said Jennifer Tonda, director of institutional sales at 280 CapMarkets.

“If you look at the ESG ETFs for both equities and bonds, many have held up better than a lot of their peers,” she added. “Investors are going to be looking at how companies deal with the effects of COVID-19 which can also affect how we deal and prepare for future global crises and global warming.”

William Sokol, director of ETF product management at VanEck, said the increase in ESG-related debt reflects an evolution in the bond markets that more issuers are recognizing the demand from investors.

“This year we’re seeing a big increase in sustainable bonds because of a big increase in social and healthcare related spending, but investor demand continues for values and mandates around ESG,” he said.

Reporting and standards related to ESG debt issuance still has a long way to go, but Sokol said it is not as easy as just labeling a bond as sustainable.

Unlike the majority of debt issuance that is generally labeled for general corporate purposes or capital spending, ESG debt requires use of purpose disclosures that typically includes ongoing disclosures to help track the proceeds.

“With green bonds, they will tell you the project that the money is for,” Sokol said. “It often includes more frequent reporting and the reporting is sometimes very granular.”