APG has been an advocate of the green, social and sustainable bond market for years
2020 is set to become a record-year for global green, social and sustainable (‘labeled’) bond issuance, with more deals and increasing variation in terms of size, labels and issuers. Spurred on by skyrocketing issuance of social bonds in response to the Covid pandemic, the market has reached a point of increasingly rapid growth.
The market has been growing year after year since the world’s first green bond was issued in 2009. But there are definite signs that the market is shifting gear; in the first nine months of 2020, total labeled bond issuance stood at € 304 billion, compared with € 274 billion issued throughout the whole of 2019. In part, market growth is driven by the same factors as before, such as stricter environmental legislation and a shift in investor preference towards a more sustainable asset allocation.
Inflection point
But there are also other factors at work. The social bond market has seen a flurry of activity this year in response to the Covid pandemic. Governments, supranational agencies and even companies have issued ‘Covid bonds’ to fund, among other things, employment protection programs and support for small businesses. The European Union (EU) recently issued the first tranche of up to € 100 billion in EU social bonds to protect employment. Together with the EU’s plan to finance a third of its € 750 billion recovery package through labeled bonds, this will give a further boost to the market.
“Following the Covid outbreak, the labeled bond market has reached an inflection point of accelerated growth,” says Joshua Linder, credit analyst Fixed Income at APG Asset Management (APG). Strong growth is reported for all labeled bond types. But social bonds, in particular, experienced a startling jump, with issuance in the third quarter of 2020 over 11 times higher than the previous year.
Diversity in size, labels and issuers
The scale of individual labeled bond deals also makes 2020 stand out. During the first nine months of this year, there have been 30 deals of over € 1.7 billion ($ 2 billion), compared with 15 across the whole of 2019. One of these large deals was the € 4.85 billion sustainable bond issue by Google owner Alphabet - the largest labeled bond ever issued by a company. Linder: “This bond is a good example of the project mix enabled by a sustainable bond, combining impactful projects linked to affordable housing and support of small businesses with environmental initiatives.”
The € 1.7 billion-plus bond issues are distributed broadly across issuers (governments, supranational agencies and corporates) and labels (green, social and sustainable). “This is another indication that the market is maturing rapidly”, says Adam Hynes, portfolio manager Fixed Income at APG. “Market growth not only allows us to increase our exposure, but also to diversify across sectors and issuers that were not previously participating in this market.”
Growth has been particularly strong in the financial sector. One example is the social bond issued by Spanish bank BBVA in May 2020, the first Covid bond issued by a European financial institution. “During the peak of the crisis, several Spanish banks responded by issuing social bonds to combat the healthcare emergency and the pandemic’s socioeconomic impact”, says Rinse Boersma, portfolio manager Credits at APG. “Significantly, the issuance was five times oversubscribed, but due to our longstanding relationship with issuers we could still get a good allocation.”
Also, there were several sustainability-linked bond deals during the third quarter of 2020, an encouraging sign of momentum in this nascent market. Contrary to labeled bonds, the proceeds of sustainability-linked bonds are not ringfenced for particular ESG objectives but can be used for general corporate purposes. The issuer, however, promises to achieve specific environmental or social goals and has to pay a premium if these commitments are not met.
Driving the market
From the beginning, APG has encouraged the growth of the labeled bond market on behalf of its pension fund clients. “It is not overstating things to say that our engagement with companies and stakeholders has been a driver for the development of this market”, says Scott Cavanagh, credit analyst Fixed Income at APG. “APG is well known for being a tried and true advocate of growth in labeled bond issuance as well as for its leadership through a range of initiatives.”
“As one of our peers stated: ‘You always know who will be asking about green, social or sustainable bond issue’,” Cavanagh continues. “We share what we find important and the lessons learned from prior deals with companies and other stakeholders. And of course we express our interest in labeled bond issuance and overall support of the market. That is key to our approach.”
Contribute to sustainability ambitions
Investing in labeled bonds is becoming more and more important to APG and its pension fund clients. At the end of 2019, we had invested € 9 billion in such bonds on behalf of ABP, bpfBOUW, SPW and PPF APG, making APG one of the world’s largest labeled bond investors. In 2020, we have thus far invested over € 1 billion in Covid bonds. To make (potential) issuers aware of our expectations and foster healthy development of the market, APG has published the Guidelines for Green, Social and Sustainable bonds.
With the market expanding and issuance becoming more varied in terms of deal size, issuers and labels, the labeled bond landscape is clearly evolving in the right direction. There remains, however, ample room for improvement. “It is important to always be aware of potential greenwashing,” Cavanagh says. “And while APG is a clear advocate of the market, we also acknowledge that not all deals fit with our risk and return criteria.”