The impacts of COVID-19 on social and economic inequality are known to be broad and far-reaching, affecting all segments of society, from underserved communities and marginalised groups to small businesses, entrepreneurs, and women and girls.
This has brought the social element of ESG (environmental, social, governance) considerations to the fore for corporates and institutions across the Americas, which are increasingly harnessing innovative financing solutions to tackle social issues.
A pandemic peak
Following the onset of the pandemic, the adoption of COVID-19 recovery programmes sparked the growth in socially-themed financings. However, as the pandemic has evolved, funding has shifted, as can be seen in social bond figures: after peaking at more than US$90 billion in the first quarter of 2021, global social bond issuance declined throughout the rest of the year before a modest rise in Q1 2022 [1]. The downward trend in activity resumed in Q2 2022, with less issuance of social-labelled debt coming to market than in the previous quarter.
“While corporates and financial institutions remain intent on including social initiatives within their sustainability agendas, the focus has recently shifted towards environmental measures with more quantifiable targets,” says Anne van Riel, Head of Sustainable Finance Capital Markets Americas, BNP Paribas. For example, General Motors’ new Sustainable Finance Framework outlines how GM will fund projects supporting its all-electric vision, while including initiatives geared toward socioeconomic advancement.
While corporates and financial institutions remain intent on including social initiatives within their sustainability agendas, the focus has recently shifted towards environmental measures with more quantifiable targets.
Anne van Riel, Head of Sustainable Finance Capital Markets Americas, BNP Paribas
Accordingly, new ways of incorporating social-themed initiatives in capital markets transactions are emerging in the Americas, whether by adopting a complementary approach that combines green and social elements, or harnessing innovative new solutions.
Innovation opportunities
In Latin America, corporates and institutions have been pioneers in social-themed issuances. In July 2022, Banco de Chile issued its Sustainability Financing Framework. The framework enables the bank to issue green, social or sustainability bonds and loans to support eight eligible categories, including micro, small and medium-sized enterprises (MSMEs) and women-owned enterprises; socioeconomic advancement and empowerment; and access to basic infrastructure and affordable housing. BNP Paribas worked closely on the development of the framework as sole Sustainability Structuring Agent.
In the US, OneMain Financial launched a four-tranche US$600 million Asset-Backed Securities (ABS) social bond in April, one of the first social ABS transactions by a US issuer. OneMain’s ABS-dedicated Framework aims to help traditionally underserved populations, specifically rural and low-income borrowers, access responsible financial products and services.
The OneMain ABS social framework specifies that only consumer loans made to rural borrowers, 75% of which are consumer loans made to low-income borrowers, can be included as collateral in an ABS social bond. BNP Paribas acted as Joint Bookrunner and Sustainability Structurer on the ABS social bond, having also helped OneMain launch its inaugural unsecured social bond in June 2021 as Left Lead Bookrunner, Billing & Delivery Agent and Joint Social Bond Structurer and Coordinator.
A complementary approach
While the environmental portion of ESG remains dominant, issuances are increasingly pairing ‘E’ and ‘S’ components to achieve a more comprehensive sustainability package.
“Many issuances have combined green and social elements in an effort to provide a more complete, holistic solution,” remarks Hervé Duteil, Chief Sustainability Officer Americas, BNP Paribas. “Going forward, ‘S’ investments must be positioned to complement carbon-reducing initiatives.”
Many issuances have combined green and social elements in an effort to provide a more complete, holistic solution. Going forward, ‘S’ investments must be positioned to complement carbon-reducing initiatives.
Hervé Duteil, Chief Sustainability Officer Americas, BNP Paribas
An example of this is the Republic of Peru, which premiered a pair of sustainable bond transactions in October and November 2021: a US$2.25 billion, 12-year issue, along with a US$1 billion, 50-year issue. As the first set of initiatives under the country’s new Sustainable Bond Framework, the bonds will be used to fund Peruvian social and economic development projects designed to align with the United Nations’ Sustainable Development Goals. In November Peru also issued a €1 billion, 15-year social bond. BNP Paribas served as Global Coordinator and Joint Bookrunner for both the US dollar and euro-denominated transactions.
“While companies can have in place solid social initiatives covering their corporate footprint, the most meaningful impact will be through their lending and investment portfolios while adopting robust targets and sustainability performance indicators. That’s where banks come in,” Duteil adds.
A common framework
Whereas COVID-19 represented a relatively easy way to quantify spending, assessing the impact of financial inclusion, access to employment or female entrepreneurship has been tougher. BNP Paribas’ 2021 ESG Global Survey found that over half of institutional investors (51%) considered social initiatives the most challenging to analyse and integrate, in large part due to insufficient data, as well as a lack of standardisation around social metrics.
This underscores the need for expanding the types of social themes that can be easily monitored and measured on a rolling basis. For instance, earlier this year the Social Bond Principles Working Group of the International Capital Market Association published its Harmonised Framework for Impact Reporting for Social Bonds. The framework aims to help foster a broader discussion around social bond issuance, offering a set of reporting principles and recommendations for issuers with respect to social bond proceeds. It also provides a reporting template covering both quantitative and qualitative data that can be tailored to issuers’ specific circumstances.
Going forward, having a standardised set of metrics for assessing a company’s social impact, whether it’s within the firm itself or society at large, could help drive greater awareness and interest in the social aspects of ESG.
[1] Moody’s Sustainable Finance Market Q1 2022