Social incentives

For thousands of Koreans, income inequality and poor housing is an everyday reality. But the emergence of social bonds are changing the game.

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This article is also available in Korean.

Critically-acclaimed Korean film Parasite offers a rare glimpse into the cramped living conditions facing residents of Seoul’s banjiha, or semi-basement homes. The 2020 Academy Award-winner for Best Picture shines a spotlight on a growing trend of income inequality and the resulting housing crisis that Korea is facing.

Like many other developed countries, Korea is grappling with the challenges of providing affordable, quality housing for low and middle-income families, especially in its large cities.

Home ownership is expensive in Korea for a number of reasons. Urbanisation, speculation, and sometimes inadequate access to housing finance all add up to Korea suffering from some of the world’s least-affordable real estate, even in a global context. The country’s unique jeonse  rental system, which requires large cash deposits, also makes it difficult for low-income families to save enough to get a foot on the property ownership ladder.

Old residential area in Seoul, South Korea

The Korean government established the Korean Housing Finance Corporation (KHFC) in 2004 to help address some of these issues. Its mandate is to improve national welfare by facilitating the long term and stable supply of housing finance in Korea. The lender is a regular issuer of covered bonds and mortgage-backed securities to finance its efforts to help those low and middle-income families buy their own homes.

Pioneering the market

In recent years, KHFC has emerged as a pioneer of social bond issuance to fund their activities. Social bonds are a subset of the fast-growing Green, Social and Sustainability (GSS) category of bond issuance, and they are poised for growth as a financing solution to Asia’s broad spectrum of social needs. That includes activities like KHFC’s mortgage lending, which delivers positive social outcomes.

Having issued the first Asian social covered bond in 2018 and the first Asian AAA social covered bond in 2019, KHFC returned in February this year with a EUR1 billion deal. The success of the deal demonstrated the power of this format to attract new investors at the same time as directing capital to urgent social needs.

“KHFC has opened up a new and crucial market for issuers that make a positive impact in societies across Asia,” says Chaoni Huang, Head of Sustainable Capital Markets, Asia Pacific, at BNP Paribas. “They have the power to make a real difference to communities around the region, whether that means allowing an ordinary family to buy their own home, building schools and hospitals where they are needed most or ensuring that people have reliable access to clean water.”

BNP Paribas has acted as Joint Lead Manager for all of KHFC’s social covered bond transactions to date.

Defining social

For a bond to be labelled “social”, issuers need to establish a framework to show how the funding will achieve positive social outcomes.

Independent agencies then validate these proposed outcomes. Issuers are also expected to provide continued transparency about how the proceeds are being deployed, as well as measuring their impact, through post-issuance reporting.

The International Capital Markets Association (ICMA) has published Social Bond Principles that provide guidelines for issuing these securities.

Interest rates for social bonds are typically similar to those for conventional bonds. However, with more than US$30 trillion of global investments – and rising – being managed in accordance with Environmental, Social and Governance (ESG) principles, Ms Huang argues that social bonds can offer issuers longer term strategic advantages. “Issuers can attract new and high quality investors, especially from Europe, by using social and green labels for issuance,” she says, pointing out that KHFC has successfully targeted the European investor base by issuing in euros.

Demand for GSS bonds continues to outstrip supply, according to Ms Huang. According to the Climate Bonds Initiative, global GSS issuance reached US$342.8 billion in 2019, up a stunning 69 percent over 2018. Social bonds are still a small component of GSS as a whole, with USD20 billion of new sales in 2019, but they also achieved strong growth of 41 percent year-on-year.

More Asian issuers are joining KHFC on the social bond bandwagon. In January this year, India’s Shriram Transport Company raised US$500 million with the country’s first international public social bond. The proceeds will be used for employment generation, including through financing for micro, small and medium enterprises.

A more social future?

Experts predict that green financing volumes, as a proxy for the broader GSS market, will continue to surge in 2020: the Climate Bonds Initiative forecasts US$350-400 billion of green bond and loan issuance in 2020, up from US$255 billion in 2019.

” The biggest challenge with issuers is simply building awareness about social bonds as a relatively new issuance format. ”

Robust investor demand for ESG assets should support this growth. In the BNP Paribas ESG Global Survey 2019, the majority of asset owners and managers who responded said they expected ESG fund allocations to increase further in the next two years.

However, the survey also identified a challenge for social bonds: nearly half of the respondents said they found “social” the most difficult element of ESG to incorporate into investment analysis. While the investment industry works towards a consensus on what constitutes the social component of ESG, Ms Huang at BNP Paribas says the biggest challenge with issuers is simply building awareness about social bonds as a relatively new issuance format.

“We want to increase understanding of social bonds,” says Ms Huang. “The more familiar and comfortable investors are with them, the greater their potential to help address social needs in Asia, across education, healthcare, housing and much more.”