ESG debt

Why issuers in Asia now need to take social bonds seriously

There are welcome signs the new asset class is finding its feet the region. After South Korea’s pioneering efforts, interest is now picking up in India and accelerating in Japan. However, not everyone is yet fully convinced of its virtues just yet.

They have not received anywhere near the same level of attention as green bonds, but social bonds are starting to gain traction in Asia and 2020 could be a breakout year.  

The signs are certainly encouraging if January is anything to go by. Last month saw a social bond from Shriram Transport Finance Company (STFC), followed by a sustainable one from POSCO and finally a covered social bond by Korea Housing & Finance Corp (KHFC) right at the end of the month. 

All three transactions demonstrated, in different ways, how the ESG (environmental, social, governance) bond market is moving in welcome new directions.

STFC’s $500 million deal was highly symbolic. It not only represented the world’s first social bond of the year and the decade, but also came from the region, which most interests socially responsible investors.

Asia offers a winning combination. As Chaoni Huang, head of Asia Pacific sustainable capital markets at BNP Paribas puts it, “Asia’s needs to fulfil their investment criteria while its bonds offer appealing yields but low default rates compared to the world’s other emerging markets.” 

India, in particular, holds huge potential given it has an enormous 1.34 billion population but a depressingly high one-in-five people living below the poverty line. Social bonds by their definition should help to spur social change given that’s what proceeds have to be used for.

At the other end of the region’s income scale is South Korea with steel group POSCO and state-run KHFC. Their respective €500 million and €1 billion deals have helped to reinforce South Korea’s status as non-Japan Asia’s most active issuer of bonds with a social element, not to mention the growing attractions of the euro as an issuance currency. 

In their own right, social bonds represent a small but fast-growing component of the overall ESG (environment, social, governance) market. In 2019, global issuance amounted to $16.79 billion, or 6.2% of the ESG total according to Dealogic figures. Within Asia, they accounted for just 1% of ESG issuance.

Sustainable bonds, on the other hand, had a breakout year. Dealogic figures reveal global annual growth of 279%, bringing the asset class up to 17.85% of the total.

The growth rate was even higher in Asia, which saw volumes rise 353% to $10.53 billion.

Some market participants believe sustainable bonds could overtake green bonds as the biggest asset class of all within a few years. The structure is inherently more flexible and wide-ranging given that it encompasses green and social projects in varying ratios chosen by the issuer.

Standard Chartered’s sustainable bond lead, Rahul Sheth, agrees that they have become an indispensable part of the debate. “Since sustainable bonds allow borrowers to include green and social projects, the asset base is obviously wider and it brings a number of new issuers into the mix,” he commented.

The only reason why social and sustainable bonds are currently lagging green bond issuance is simply because they started later. The International Capital Markets Association (ICMA) issued the voluntary guidelines known as Social Bond Principles in 2017 compared to 2014 for green bonds.


And one country, which is also coming from behind, appears to have made social bonds its own: Japan. Growing interest is very apparent from both the issuer and investor side.

Dealogic data covering 2018 and 2019 shows that one Japanese corporate, East Nippon Expressway (NEXCO East), broke into the ranks of the top 10 biggest social bond issues with an ¥40 billion ($1.02 billion) offering in July 2019.  

Proceeds are being earmarked for Sustainable Development Goals (SDGs) eight, nine and 11 (see table below). They embrace traffic safety promotion, environmental conservation and the reinforcement of seismic resistance according to third party assessor, R&I.

UN 2030 Sustainable Development Goals

Goal 1 No Poverty
Goal 2 Zero Hunger
Goal 3 Good Health and Wellbeing
Goal 4 Quality Education
Goal 5 Gender Equality
Goal 6 Clean Water and Sanitation
Goal 7 Affordable and Clean Energy
Goal 8 Decent Work and Economic Growth
Goal 9 Industry, Innovation and Infrastructure
Goal 10 Reduced Inequalities
Goal 11 Sustainable Cities and Communities
Goal 12 Responsible Consumption and Production
Goal 13 Climate Action
Goal 14 Life below Water
Goal 15 Life on Land
Goal 16 Peace Justice and Strong Institutions
Goal 17 Partnership for the Goals
SOURCE: United Nations

NEXCO East’s five-year deal highlights another new trend: the emergence of corporate issuers within the social bond universe. So far, banks, supranationals and government-linked entities have led the way.

However, over the past two years, there have been six corporate social bonds led by France’s Danone (for food security), followed by five from Japan. Half of the Japanese issuers have been transport companies, in addition to one healthcare operator (Miraca Holdings) and a property company (Kenedix), which is using the proceeds to finance residential and medical facilities for the elderly.  

Issuers’ enthusiasm has undoubtedly been underpinned by initiatives such a ¥50 million subsidy scheme to cover external verification costs and the Pro-Bond market’s dedicated green and social platform. This lists bonds and enables issuers to report on use of proceeds, publish external assessments and highlight impact monitoring.

This in turn, helps Japanese investors, which are also starting to become more active. Here, the $1.5 trillion Government Pension Investment Fund is taking the lead, signing a stream of agreements with the world’s supra-nationals to promote and develop ESG markets.

However, many Japanese social bond investments are flying under the radar because of their bespoke private placement structures.

One deal, which did not, was a $50 million social impact bond by the Import Export Bank of India in October 2019. The three-year deal will fund infrastructure development projects in the Mekong region and was exclusively placed with Dai-ichi Life Insurance by lead manager Standard Chartered.

Singapore-based Sheth says that this kind of deal is typical of what’s getting done. “There’s been a lot of interest from Japan and this was a case of demand leading supply, since the investor asked us to find a theme that met certain criteria they were looking for,” he explained.

Why do East Asian countries like Japan and South Korea have such a marked interest in the sector?

South Korea has been the region’s pioneer, with strong interest from the semi-sovereign and utilities sector since they began issuing in 2018. KHFC has tapped the market three times to generate funds for affordable housing: its most recent five-year deal becoming the first to achieve a negative issue yield (minus 0.019%).

Korea Land & Housing has also accessed the international bond markets once, while the Industrial Bank of Korea has issued a social bond to fund Small and Medium Enterprises (SMEs).

The sovereign itself is also the only Asia one to issue a sustainable bond to date. On the social side, proceeds being used to fund healthcare, education and affordable basic infrastructure.

One theory is that East Asian issuers and investors feel they can really make their mark with social bonds after coming later to the party than the Europeans did with green bonds.

However, some financial markets participants believe there are cultural reasons behind this enthusiasm too. One Japanese banker based in Hong Kong told FinanceAsia that, “omoiyari, or thoughtful action, is one the key pillars of a society, which values harmony and collective action."

Japan’s interest in social bonds could benefit other Asian issuers looking for diversification opportunities into yen.

Shriram’s deal was not targeted at Japan because of its high yield rating. But that would not apply to investment grade-rated issuers from around the region, whose credit typically appeals to Japan’s conservative but yield-hungry investor base.

Dollar-based issuers may also benefit from Japanese interest at the margin, particularly countries with close bilateral relations such as Indonesia and the Philippines.

A second currency that should also benefit is the euro. When it comes to conventional bonds, Asian issuers have long remained wedded to US dollars.

The one exception remains China’s state-owned entities, but the issuance ratio is still fairly low. However, the distribution statistics for POSCO's mid-January deal reveal strong ESG demand by European investors for their home currency.

The power group’s euro-denominated sustainable tranche had a higher 5.2 times oversubscription ratio than the 4.6 and 4.7 times its two conventional dollar-denominated tranches generated.  More tellingly, there was also very high 80% allocation of the euro tranche to European investors according to syndicate bankers.

Shriram has already said it hopes to diversify into euros during the next financial year. If other issuers follow suit, this may also benefit a number of European banks, which have always been active in Asia, but never quite been able to break into the top tier of the bond league tables.


When it issued its latest sustainable bond, POSCO did not allocate proceeds to specific projects upfront. This is one of the key differences between social/sustainable and green bonds, making the former far more attractive to potential issuers.

What POSCO did tell investors was a ratio: 80% to fund green projects and 20% for social projects.

Standard Chartered, on the other hand, went in the opposite direction with its inaugural €500 million sustainability bond last June. This had a split of 75% social projects and 25% green.

As Sheth explains, “financial inclusion is a big part of what we do and in parts of the world that are potentially less banked, highlighting the strong additionality factor of our financing. So that ratio made sense for us.”

Standard Chartered was also quite unusual in securing its external pre-issuance verification from Sustainalytics before it issued its bond. Most borrowers do not.

ICMA’s guidelines give issuers a one-year period before a report needs to be generated.  However, just because issuers have longer to specify the use of proceeds, it doesn’t mean they can be less careful tracking cash flows.

In some respects, they have to be more careful to ensure there are no unintended consequences. An issuer that allocates proceeds to build social housing, for example, needs to ensure its project doesn’t end up have a detrimental environmental impact.

As such, bankers acknowledge that social and sustainable bonds can be more complicated to execute.

One issue involves pinpointing what social categories make sense for each individual business. For a drinks company, like America’s PepsiCo it’s been about using more re-cycled packaging materials. For a supermarket chain like the UK’s Co-op it’s been to support producers using the Fairtrade mark.

Should companies be able to include their CSR activities too? The Social Bond Principles allow it.

However, Nick Gandolfo, associate director at second opinion provider Sustainalytics, is less sold. “It’s an interesting debate,” he commented. “If a borrower wanted to issue a bond purely for philanthropic purposes, then we’d be asking a lot of questions.”

He believes bonds should be rooted in a company’s core business: where it sources its raw materials from, how it manages its supply chain, or the way it engages with its customers.

Once an issuer has pinpointed the social objectives it wants to achieve, it then needs to select and segregate assets. These are usually much smaller and more numerous than green ones where a single project can easily amount to $1 billion.

Definitions can also be tricky especially relating to the demographics that will benefit. Local context is crucial, making harmonization difficult.

BNP’s Huang says that, “definitions vary from country to country so they can’t be standardised on a global level. An SME in Singapore is very different from one in Sri Lanka.”

However, in many instances, governments already have definitions, which borrowers can use.

Setting up a social or sustainable bond framework might also seem quite daunting to the uninitiated. Gandolfo says this should no longer be the case.

“There are lots of frameworks in the market now,” he told FinanceAsia. “New borrowers can use existing ones as templates.”

Gandolfo also highlights ICMA’s Social Bond Principles plus its “impressive resource centre,” as well as the evaluation reports of groups like Sustainalytics as good information sources.

Once a company has a framework in place, it can continually issue from it. Early leaders in this respect include China Construction Bank (CCB) and KB Kookmin, which have both issued sustainable bonds three times since 2018, plus Shinhan and the Philippines' Rizal Commercial Banking Corp, which have both issued twice.

For any borrower, widening its investor base is generally a good way to cut its cost of capital.

Structures are also becoming more sophisticated. When the Impact Investment Exchange recently issued a second $12 million Women’s Livelihood Bond, for example, the Singapore-listed deal also included a first loss piece backed by the Rockefeller Foundation and a 50% loan guarantee from USAID.

For any prospective issuers, the biggest challenge of all undoubtedly relates to the management procedures that need to put in place to ensure their businesses have sustainable objectives. Many have never considered this aspect before.

Transparency is also not a word that always springs to mind when discussing Asian corporate culture and information disclosure.

Yet as Gandolfo remarks, “Some companies relish the challenge because it’s not something they currently measure or report on, yet they know they need to and want to.

“Getting the treasury team, operational team and sustainability team all talking to each other might involve more work,” he added, “but plenty of companies realise they benefit from institutionalising certain processes.”

These internal challenges are one of the reasons why banks have been the biggest issuers to date. They already segregate and monitor assets, have an inherent social mandate via their SME lending and are more frequent bond market issuers.

Investment bankers are also well aware that they can use their own frameworks to help their client base to devise theirs and then execute bonds for them.

But as BNP’s Huang adds, investors are keen on additionality. “A bank may service an SME, but what social bond investors will be looking for is how they re-engage with the customer in the future to generate further social impacts,” she stated. “How do they expand the scope and the reach of the demographic?”

As the market develops, investors are likely to get a whole lot pickier, especially when it comes to the more complex issue of how to treat issuers that do not meet their stated social policy objectives. Should there be a mandatory step up in the coupon, or does the public nature of most bond deals mean the threat of a sell-off will be enough to ensure that issuers comply? What role can or should the rating agencies play to enforce standards?

It poses an even bigger conundrum for the syndicated loan market where deals are less public and arranger banks have an inherent conflict between their ESG aspirations and a desire to boost profitability.


One thing, which is also not yet clear, is whether certain countries will come to be known for specific SDG goals via their bond issuance. Gandolfo says it is too early to tell.

“At the moment it’s more about the understanding what themes are out there,” he said.

The three Asian countries, which bankers cite as prime issuance candidates are India, Indonesia and the Philippines. They all have large populations, high levels of inequality and government mandates to reduce it.

India has its Priority Sector Lending Directive. At a corporate and individual level, however, philanthropy is still less prevalent than other countries.

In his book “Being Indian”, local author, Pavan K Varma puts this down to Hinduism being one of the few religions that advocates the pursuit of wealth as a supreme aim in life. He ties this to the widespread belief that “people are born to their own destiny and suffer or prosper in accordance with their previous karmas.”  

He says this means that the “possibility of redemption from want and hunger the poor seek can wait their next rebirth with no need for human intervention.”

This may well be one reason why India has just scored so badly in the World Economic Forum’s Social Mobility Index. The country ranked 79 out of 82 in terms of fair wage distribution, ahead of only Senegal, Cameroon and Cote D’Ivoire.

The world’s social bond investors are well aware there is an opportunity to help rectify this, aided by local borrowers desire to trim their cost-of-capital alongside a burgeoning social awareness. The end result could be a win-win situation for the hundreds of millions of Indians who still don’t have access to a toilet or basic education.

Another area that may benefit is SME lending. The sector’s financing gap is large. In 2017, the IFC calculated it at $5.2 billion globally, of which Asia accounted for $2.4 billion.

Indonesia is a standout in this regard. Its SMEs account for nearly two-thirds of the country’s GDP, but banks only allocate them one fifth of their loan books because of the complexities and risks involved with so many small borrowers.

It is another country where social and sustainable bond issuance is expected to take off this year. So far, the government has been a leader in green bond issuance, but has yet to add sustainability to its belt.

However, Bank Raykat has already issued one of the region’s largest sustainability bonds following its inaugural $500 million offering last March. New candidates include Mandiri, Bank Central Asia (BCA) and Bank Permata based on their degree of stakeholder awareness and strategy according to a recent World Wildlife Fund (WWF) report on sustainable banking in Asean.

Malaysia should also be a prime issuance contender based on its banks’ much better track record at banking SMEs. McKinsey’s 2019 banking review put the country in the regional top spot, stating that SMEs are able to source 30% of their working capital from the sector.

Last year, CIMB became the first bank to issue a sustainable Formosa bond related to the UN’s SDGs. It also remains the only Asean bank signed up to the UN’s Principles for Responsible Banking.

Another breakout country is likely to be Thailand where Bank of Ayudhya issued the first private sector gender bond last October, raising $220 million via its Women Entrepreneurs Bond. Prior to that, Kasikornbank became Asean’s first with its $100 million sustainability bond back in 2018.

And then there are the frontier markets. Countries like Sri Lanka and Pakistan are regular conventional bond issuers.

Adding in a social bond element would almost certainly help both to trim costs.

For instance, the new Sri Lankan government has put SMEs at the forefront of economic policy and says it wants to create an SME-focused policy bank. 

Further east, Indochina has only just started to develop capital markets and here microfinance-led initiatives could play a starring role. The Cambodian government may not yet have developed a yield curve for its debt, but last March, the banking sector unveiled its own Sustainable Finance Principles and Implementation Guidelines.

And then there is China. The country has taken a global lead in green finance since the US pulled out of the Paris agreement and is keen to reverse the environmental degradation of its rapid industrialisation. Most bond market experts, therefore, expect the green element of sustainable finance to continue dominating the social.

But if social bond issuance fulfils its potential in Asia, it could end up being a far higher percentage of regional ESG issuance than it is in Europe. Right now, market participants acknowledge that awareness is still on the low side and there’s general agreement that the green element of sustainable bonds will still dominate even if social bond issuance accelerates.

BNP’s Huang believes that “issuers will definitely be keener to put social or sustainable frameworks in place if global ESG investors become more active in Asian credit and Asian-based investors get into the game.”

She notes that demand currently outstrips supply, but adds that issuers and investors need to take a few more steps before they meet in the middle and volumes accelerate.

“But there’s no doubt about the potential,” she continued. “Asia should be a natural choice for investors looking to generate social or sustainable impact.”

And the signs are all positive. As Sheth concludes, “The level of client dialogue has gone ballistic over the past year or so. We’re going to be breaking new records.”

¬ Haymarket Media Limited. All rights reserved.
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