Posted inESG

Shift to multi-stakeholder model to spur sustainable bonds

Business process management and workflow automation diagram with gears and icons with connection line network in background. Manager touching interface

More and more companies will apply a multi-stakeholder approach and spur sustainable bond issuance, Moody’s has said in a report.

The credit rating agency forecasted that on the back of this and other environmental, social and governance (ESG) trends that will be accelerated by the coronavirus, sustainable bond issuance could hit between $325bn (€273.7bn) and $375bn in 2020.

Matthew Kuchtyak, AVP-analyst at Moody’s Investors Service, said: “Combined social and sustainability bond volumes could now total $150bn for the year as coronavirus pandemic response efforts and heightened awareness of social issues related to healthcare and inequality continue to support issuance.

“We maintain our green bond issuance forecast, revised in May, of $175bn to $225bn for 2020.”

Sustainable bond trends

Moody’s suggested that three ESG areas will receive heightened focus by market participants going forward.

In addition to shifts from shareholder primacy in corporate decision-making towards a consideration of other stakeholder needs; it identified institutional preparedness for high-impact global risks; and social considerations related to healthcare access and economic inequality (see table below).

“The pandemic may accelerate a shift in companies viewing shareholders as their leading constituency in favour of multiple stakeholders, including clients, employees and their communities, driving an acceptance of a stronger social dimension to corporate strategy.

“For example, a number of aspects of corporate business models and behaviour have received increased attention during the current crisis. These include how a company protects the health and well-being of its staff, whether it has a propensity to furlough workers or make them redundant, what pay and labour practices it follows, and what its shareholder return policies are,” the report said.

In a separate report, Moody’s affiliate Vigeo Eiris identified 122 corporate controversies related to the coronavirus pandemic through 28 May.

Top affected sectors included hotel, leisure goods and services, food, software and information technology services and insurance.

Controversies covered a wide array of issues, led by incidents related to health and safety, customer relations, and social dialogue (see graphs below).

For example, companies largely relying on gig economy workers – such as Uber Technologies, Lyft and Deliveroo – have faced challenges associated with heightened social risks of employees, who potentially had to choose between their health and their incomes, the report noted.

Credit quality

The Moody’s report further explained that potential shifts in areas such as minimum wage policies, gig economy employment models, executive pay and shareholder returns may also have ramifications for corporate credit quality.

“Companies that change their business models to address these concerns may encounter higher costs and lower profitability,” it said.

This would mean that it becomes more important for companies to adequately convey their sustainability strategies to investors.

But the firm also pointed to opportunities for those companies that are able to successfully adapt to ESG considerations and improve their competitiveness.

Social bond issuance

As a result of these trends, the credit rating agency also found in its report that social bond issuance has hit an all-time record high in Q2, with $33bn, followed by sustainability bonds, which increased to $19.1bn.

While this boosted global sustainable bond issuance to $99.9bn in the second quarter of 2020, green bond volumes recovered only slightly from a prior low in Q1 to $47.8bn (see graph below).

European issuers and financial institutions accounted each for a nearly two-thirds share of global issuance during the quarter (see graph below).

Both of these segments were led by the French insurance organisation Unédic (National Professional Union for Employment in Industry and Trade), which issued two record social bonds of €4bn each in the second quarter, Moody’s said.

The continued battle against Covid-19 and the heightened focus on social issues will continue to bolster social bond issuance during the second half of the year, it added.

Elena Johansson

Senior Reporter