2020 vision: Social Bonds and the S in ESG

The Covid-19 pandemic has turned even greater attention to building a sustainable society.  We report on the most challenging pillar (Social) in ESG and the importance of social bonds for society’s transformation.

Individuals, communities and organisations were forced to learn much – and to learn it quickly – as the Covid-19 pandemic swept across the globe.

The need to protect, innovate and collaborate became critical as the serious medical, economic and social implications of the crisis unfolded.

A rapid response from the financial sector has been critical both in supporting the world in the midst of a crisis, and in helping it rebuild as stability returns.

A social problem

Pre-coronavirus, environmental, social and governance (ESG) issues already were driving debate about how best to build a sustainable future, but these were typically dominated by the urgency of the E pillar, particularly climate change risk. For its part, the S pillar has often been ‘lost in the detail’.

BNP Paribas Securities Services’ Head of Company Engagement, Florence Fontan, says: “The pandemic has accelerated a need to understand social risk, driving the S to equal prominence alongside the E in building a sustainable model for the future.”

“Historically, the focus has been on the climate and environment. Yet, over the past 18 months the ‘S’ started to gain traction and since gained more momentum post-pandemic,” she says.

Life in lockdown not only highlighted many of the vast disparities in wealth between different sections of society, in some cases it exacerbated them. For example, in the UK, age-adjusted death rates in the most deprived areas were double those in the least deprived areas.

Simultaneously, global anti-racism protests reminded policymakers and society at large that even in the wake of the worst health crisis in memory, social issues matter and the failure to respond effectively has serious consequences.

BNP Paribas’ Global Head of Sustainable Finance for Financial Institutions Coverage, Alexandra Basirov, says: “These unprecedented times are not just because of the pandemic; we are also seeing damaging human, social and economic consequences, and a greater focus against racism and inequality.  The importance of the S in ESG is now very clear, and people are more aware of this when they allocate their capital”

A 2020 BNP Paribas Asset Management survey of investor attitudes to ESG conducted in June, found almost a quarter of respondents (23%) believe ESG has become more important as a result of the Covid-19 crisis. Tellingly, social issues were considered far more important post-than pre-pandemic; half of respondents saw social issues as important before the crisis, compared with 70% today. Additionally, nearly eight out ten (79%) respondents expect social issues to have a positive long-term impact on both investment performance and risk management.

The performance test

ESG investment strategies passed their first real performance test during the pandemic, with some evidence suggesting these strategies outperformed their traditional counterparts. It stands to reason then, that appetite for sustainable products is growing; global assets held in exchange traded funds and products invested according to ESG principles surpassed USD 100 billion at the end of July, up from USD 88 billion at the end of June.[i]

Financial support for capital markets has been vital in dealing with the coronavirus fallout. As part of its existing offer of social bonds, BNP Paribas developed specific Covid-19 related bonds. The bank has supported clients by delivering USD 59 billion of liquidity to a market that has grown to over USD 100 billion [ii].

Social bonds are a type of sustainable bond, with the capital raised used to fund defined projects, which must be reported and must have a primarily social objective, as per the ICMA Social Bond Principles. Social bond issuance reached USD 50 billion in the first half of 2020; more than double that the entire of 2019 [iii].

BNP Paribas’ Co-Head Sustainable Finance Markets, Agnes Gourc, says: “The crisis inspired more innovation in social bonds, which was already an important area for us. There were relatively few issuers of social bonds and we were able to finance healthcare and other social projects, as well as support smaller and medium sized companies through COVID 19 bond issuances from our clients.”

Indeed, the financial sector’s ability to react swiftly by helping governments and business survive the immediate impact of Covid-19 – and in developing products that offer long-term sustainable support – has been invaluable.

Ms Gourc says: “The financial sector is fully integral to answering this problem. Banks can deliver financing quickly, and have demonstrated this throughout the crisis by delivering solutions helping individuals through to governments.”

The crisis has allowed a sector reputationally damaged during the financial crash of 2008, to demonstrate its real worth in limiting the harmful impact of Covid-19 both in the short- and long-terms. As Ms Fontan notes “There really is an imperative for collective action. All actors – investors, companies and governments – must find the solutions to address the key social challenges, with banks playing an active role.”

Made to measure

There is more to do, however. Measuring the impact of social investment remains challenging. Unlike environmental impact, which can now be determined in terms of carbon emissions or use of fossil fuel, social impact remains nuanced and subjective.

Ms Fontan says typically social scores under ESG have the most diverse key performance indicators. For example, social scores can cover myriad impacts from workplace safety, employee education, diversity and community involvement.

She adds: “It can be difficult to get objective data. Even where data exist it is not easy to identify and the impact is granular or specific to one cause.”

Measuring the social impact is made yet more complicated by companies often only reporting on social policies and commitments rather than their impact of such policies.  

Ms Basirov says: “Looking ahead, we expect a lot more scrutiny on companies’ social factors and how they disclose the impact/s of their initiatives and commitments.”

The growth in social bonds, according to Ms Gourc, will make measuring the S more straightforward.

She says: “The growth of social bonds in 2020 could help companies and investors highlight how investment in social impact is helping to improve their companies. The growth in social bonds will bring an increased focused on the S, in ESG, and could eventually lead to higher social scores overall as more investments are geared to delivering social impact.”

The post-Covid-19 reality is yet to be fully understood, but there is no escaping there are difficult years ahead. Banks will continue to play a pivotal role in easing the worst of the devastation in the short term in addition to ensuring economies and societies thrive in the long-term.

There is much still to learn from the crisis, but it is clear there are opportunities to create a fairer, healthier society and we are already seeing the benefits of putting the social at the centre of our success.

BNP Paribas’ mission is to contribute to responsible and sustainable growth by financing the economy and advising clients according to the highest ethical standards
To learn more about BNP Paribas approach to sustainability and its commitments to society during the Covid-19 pandemic, read our 2020 Company Engagement brochure