Unite forces to address Covid-19 impact

Green and social bonds a binding factor

Difficult times can bring out the best in people. The hope for many of us is that the world may become a little more sustainable in the aftermath of these challenging times.

Many countries are still struggling with waves of Covid-19 contamination and some are already in their second wave, but focus is shifting to reopening and managing the impact on the economy.

In this unprecedented economic situation, we have seen in recent months that several sectors and economies have been hit harder than others.

The extent to which countries are economically hit, depends not only on traditional measurements like export-dependence and industrialisation, but this time the length and degree of the lockdown period are more important. The International Monetary Fund (IMF) revised its forecast in June and projected ‘a deeper recession in 2020 and a slower recovery in 2021’

Latest World Economic Outlook Growth Projections

Latest World Economic Outlook Growth Projections
Source: IMF, World Economic Outlook Update, June 2020

The GDP expectation for countries with an intense and long lockdown period is negative growth of more than 10% for 2020.

Also, the impact on the different sectors is not evenly distributed. In an economic crisis of this magnitude, cyclical sectors are hit hard/In the current environment, the outlook for contact-intensive sectors like travel & leisure is also very weak. Others, such as online commercial activities, are doing better.

Although it is still too early to show the numbers for the second quarter in detail, sales and traffic updates allow us to estimate that the automotive industry and airlines will be among those hit the hardest. 

New passenger car registration in the EU

New passenger car registration in the EU
Source: ACEA

IATA Survey of airline CFOs and heads of cargo

IATA Survey of airline CFOs and heads of cargo
Source: IATA

Despite the differences between economies and sectors, the labour market has been hit massively in every country, particularly lower-income and semi-skilled workers who are unable to work from home. It is therefore important to protect the labour market as the engine of every economy, and also to prevent further income inequality and poverty.

Monetary policies and fiscal budgets are being put in place to help people and fight the economic crisis. The main tool of the European Central Bank (ECB) has become the Pandemic Emergency Purchase Programme (PEPP). Other central banks have comparable programmes. Fiscal budgets are also being expanded by large amounts.

These programmes are immense. The PEPP was recently upgraded to €1.35 trillion, and extra fiscal budgets usually account for more than 4% of GDP. At the same time there is a public and corporate call to use the budgets in a sustainable way (source: BloombergNEF). 

We share this view that this huge amount of money creates opportunities, but it is indeed even more important that the money should not be used in the wrong way. Governments, central banks and Investors play different roles. One common factor that unites these different stakeholders are Green and Social bonds which play a crucial role in steering the money in the right direction. 


The new fiscal stimulus programmes are mainly national affairs. The main funding source is the issue of government bonds. The EU recovery fund of €540 billion is perhaps an exemption because of the cross-country character, which is important to help the countries with less headroom in their fiscal budget. However, it cannot be considered separately from each nations' own measures. Germany alone has already increased its stimulus package by €130 billion. 

Fiscal budgets are then used to make direct payments. The first payments were started immediately, and were allocated to medical care, direct money transfer to consumers and small-scale entrepreneurs who had lost their income.

Now that the virus is becoming more manageable, the time has come to deal with under what conditions the budget is allocated. Although it has taken a while, we now see a trend where governments are imposing conditions or asking for commitments when they provide support. This is particularly apparent for larger corporates.

Rescue packages

A good example is the Dutch Government's rescue package for KLM. A loan (guaranteed loan of €3.4 billion) is made available to KLM on certain conditions. The conditions have to be worked out, but sustainability and limitation of nuisance will undoubtedly be key. This package will limit the direct and indirect economic impact on the Dutch economy, and at the same time, it will satisfy the wish of the taxpayer to reduce the (environmental) impact of air traffic.

Another example is the French Government's rescue package for Renault. Several banks have provided Renault with a €5 billion loan package that is 90% guaranteed by the French state. The Finance Minister has said that the country expects in return a commitment to prioritise the production of electric vehicles and fair treatment of sub-contractors.


Monetary stimulus is a different cup of tea. In the current crisis, most attention is paid to the purchase programs as policy tool. The PEPP is providing an extra budget to secure funding and liquidity for issuers in a crisis like this, and to keep the funding yield under control. The purchase programmes include the acquisition of public (government, agencies) and corporate bonds.

Although the ECB relaxed certain ‘eligibility’ criteria under the PEPP1, the recent purchase breakdown still indicates a strong involvement of private investors for both public as well as corporate bonds (the ECB holds not more than 20% of eligible corporate bonds). 

The ECB's involvement in driving up sustainable investments is indirect; “…prompt us to use the fight against climate change as a parameter when calibrating our programmes for purchasing assets in the market - but it cannot be the sole parameter2.” The holding of 20% of all green bonds is also more of a consequential coincidence than active policy.


Investors also play a role in addressing the economic impact of Covid-19. Ultimately the biggest proportion of public and corporate bonds is bought by private investors. It would therefore be a huge loss not to steer those budgets towards more sustainable investments.

Investors have different tools to steer their investments, among which exclusion and engagement are popular. Although both are effective, engagement usually takes at least two years before one sees result. Alternative mechanisms for steering investments include Green and Social bonds.


In the rebuilding phase of the COVID-19 crisis, governments and central banks can play a crucial role by driving up sustainable investments.

Growing Green bond issuance

Growing Green bond issuance
Source: Refinitiv

The money from private investors is still crucial, however, and green and social bonds can be an important tool for steering them towards more sustainable investments. At the same time, investors such as pension funds and insurance companies can use these instruments to show that the premiums are being allocated to sustainable investments.

During the crisis, social impact bonds have taken center stage

During the crisis, social impact bonds have taken center stage
Source: Refinitiv

Green and Social bonds are "use of proceeds" bonds. The most commonly used grouping is that of the ICMA Green & Social bond principles. Distinctions are made between Green, Social & Sustainability (combination of Green & Social) bonds. 

Use of proceeds

Use of proceeds bonds have the risk and return characteristics of normal bonds, with the difference that the proceeds are allocated to qualifying projects. Use of proceeds bonds have a secured or unsecured claim against the whole company and not just against the allocated assets (use of proceeds).

Green & Social bonds are for the most part issued in the Investment Grade (IG) rating category and the euro is currently the dominating currency in this universe. 

While the risk and return characteristics of individual Green & Social bonds are comparable with individual normal bonds, this is not the case for a diversified fixed income index or portfolio. 

Normally, bonds are issued with a provision that the money should be used for general corporate purposes. Companies normally give some guidance on what they are doing, and how the money is used, but there is normally no discussion how the money is used during the process of building a book for a new deal. 

With use of proceeds bonds, investors know exactly which type of project their money is being invested in. During the book building process, a framework is presented that sets out how the projects are selected and the minimum criteria. When setting up a framework there is usually an extensive dialogue with investors and also an opportunity to engage with the company and steer the (sustainable) direction of the investments.

The Euro Green & Social bond market is still in its infancy if we compare the size (<2% of Euro iBoxx overall) and diversification of the Green & Social bond universe. For Green bonds, especially, the credit market (credit = corporates + financials) is relatively concentrated in the banking and utility sector and the number of different issuers is limited. For Social bonds we see a concentration in what is termed the SSA category (Supranationals, Sub-Sovereign and Agencies) and in the banking sector. If a (credit) strategy is to invest only in Green & Social bonds, it will make the portfolio vulnerable to concentration biases in both sectoral and single name exposures.

An important characteristic of "use of proceeds" bonds is that the proceeds are allocated according to certain criteria which are recorded in a separate green or social issue framework. This means that the proceeds cannot be used for other less ambitious purposes or, worse, for projects that run counter to the goals of the investor.

Green bonds can help, but most directly applicable in the current crisis are Social Bonds.

Therefore, the Green & Social Principles of the International Capital market Association (ICMA) have published guidance on how to use Social Bonds in addressing the COVID-19 crisis. The guidance gives a better understanding for both issuers and investors of channelling the "use of proceeds" directly to social impact projects that will mitigate the impacts of COVID-19.

Since the launch of this initiative3, we have seen mainly agencies like the Council of Europe Development bank (with its €1 billion Social inclusion bond), but BBVA (Banco Bilbao Vizcaya Arg) recently launched the first private bond (€1 billion Pandemic bond). BBVA is using the money for social projects aiming at mitigating the grave social impact caused by the pandemic.

Green bonds can help steer the investments in the right direction when investments are starting up again. At the moment, the number of opportunities is low because companies are delaying investments due to the low economic activity.

Sustainable Debt euro Issuance ($billion) by instrument type

  • Issue of Green bonds is lagging behind the same period last year because of a lack of Green projects during the lockdown period
  • More Social bonds issued than the same period last year because of the pandemic

Sustainable Debt Issuance ($billion) by instrument type
Source: Bloomberg NEF, 22 June 2020

However, Daimler recent launched its inaugural Green Finance Framework. This framework is a good example how the proceeds can be used through the entire production chain – from sustainable resources and the production of electric vehicles through to recycling the batteries.

Daimler group strategy
Sustainability as an integral part, with a focus on six themes and three enablers

Daimler group strategy
Source: Daimler.com

Daimler’s green finance framework

Daimler’s green finance framework
Source: Daimler.com

A much heard criticism is that not enough Green & Social Bonds are being issued. However, we also expect governments to issue these types of bond, both Social and Green bonds.

If we only take into account the fiscal stimulus that is in place right now (current International Monetary Fund estimate of $10 trillion worldwide), and when we only allocate a fraction of a percentage point of that to Green & Social bonds; we would already have multiplied many times the issuance of Green & Social bonds in 2019. Therefore, this opportunity should be seized.


Green and Social bonds can also be an important instrument for pension and insurance companies, including for the less ebullient sustainable investors amongst them. Regulators are increasingly asking for a climate sensitivity analysis. Green and Social bonds offer a straightforward solution to limit the impact of the investments. Also the new EU taxonomy may prove to be an impulse to use more Green and Social bonds. 

Green and Social bonds are usually managed in segregated mandates or as specific funds for sustainable investors. 

ACTIAM does not manage Green and Social bonds as a separate strategy – because of concentration in issuers and sectors – and integrates these bonds into the ACTIAM Euro Obligatiefonds (Euro Sustainable Fixed Income Fund).

Although the Green & Social bonds have an enormous potential for growth, we consider that they will always be a smaller part of the larger universe. The sustainable investor determines the direction of the trend in sustainable investments, and Green & Social bonds must therefore also be seen as an engagement with issuers and/or market. What is green or social today, will be the standard for tomorrow.

In line with this, the launch of sustainable linked bonds (SLB), under the umbrella of ICMA4, is another interesting development. The cornerstone of a SLB is that the bond’s financial and/or structural characteristics can vary depending on whether or not the selected KPIs are reached.

This is an extra tool for steering the money in the right – sustainable- direction, and for engaging with issuers and will reach a part of the market that cannot use Green or Social bonds.

Until now, we have only seen ENEL issuing a structure like this. The money is used for general corporate purposes, but there is a coupon step up of 25 bps if ENEL is unable to reach a 55% capacity target from renewables.


In the rebuilding phase of the COVID-19 crisis, several stakeholders like governments, central banks play a crucial role by driving up sustainable investments. Investors also play a crucial role in this because they provide funding to governments and are therefore still necessary to make the purchase programmes work. Green and Social bonds are a binding factor in steering the money towards a sustainable future.