Governments and central banks around the world are exhausting their policy toolkits to address the

economic repercussions of the coronavirus pandemic, but monetary and fiscal stimulus alone may be
insufficient to deal with the crisis. On April 14, the International Monetary Fund warned that global
lockdowns would produce “the worst recession since the Great Depression.” Interest rates in the United
States, the European Union, the United Kingdom, and Japan are already near zero, and sovereign debt is
set to spike from hefty stimulus packages. Other funding solutions are needed to reduce COVID-19
infections, to deliver a vaccine, and to keep businesses running.

That’s where capital markets can help. Social bonds in particular have emerged as a way to mobilize
private capital for the public good. Like conventional bonds, social bonds offer fixed returns for investors
but use proceeds exclusively for social causes—similar to green bonds that concentrate on the
environment. As fears rise around the world of dwindling central bank ammunition and ballooning debt-
to-GDP ratios, social bonds are poised to play a crucial role in the fight against the coronavirus and its
effects.

Social bonds are essential to containing the economic fallout of COVID-19 and building resilience against
future shocks. Their proceeds could waive health insurance costs, subsidize pharmaceuticals, and support
small businesses to prevent insolvencies. In developing countries with limited fiscal firepower to keep
essential industries afloat, social bonds would be especially critical. And unlike ordinary bonds, social
bonds disclose exactly how their proceeds are used—an attractive prospect for institutional and millennial
investors who want to know how their money is used.

The social bond market has traditionally been stymied by low liquidity levels, with global issuances
totaling $13 billion last year—versus $257 billion for green bonds, according to the global research firm
Sustainalytics. Despite their value, social bonds fill a niche: addressing socioeconomic issues that other
capital market mechanisms do not. COVID-19 social bonds are generating significant investor interest,
paving the way for more issuances. Governments around the world have already lowered interest rates
near zero and doled out massive stimulus packages. The stage is now set for social bonds to move from a
niche solution to a mainstream one.

The stage is now set for social bonds to move from a niche
solution to a mainstream one.
The first COVID-19 social bond, and the only one so far from a corporate bank, was issued by the Macao
branch of Bank of China in late February. The lender raised more than $600 million from its COVID-19
Impact Alleviation bond to support Macao’s small and medium enterprises. The Chinese government has
already announced a slew of fiscal and monetary actions to provide relief to and spur lending for small
companies—but as in other countries, rising debt levels constrain the e

The World Bank’s International Finance Corporation (IFC) has since March raised $1 billion from a social
bond—its largest to date—that will boost production of medical supplies in emerging markets. The IFC
has also pledged $8 billion to existing clients in sectors directly affected by the pandemic, such as tourism
and manufacturing. In many developed countries, these industries are receiving accessible loans and
grants from the government, but economists warn that the current measures—including the United
States’ $2 trillion relief fund—simply aren’t enough to cover the long-term damage of the pandemic.

The African Development Bank in March sold its Fight COVID-19 Social Bond for $3 billion, which it
claimed was the largest-ever dollar-denominated social bond in international capital markets. That sum
will go toward essential infrastructure in Africa, such as water and food security—areas considered at risk
as African countries face the effects of lockdown, declining tourism, and lower commodity prices, Emeka
Anuforo, the bank’s communication officer, told Foreign Policy

In the European Union, the Council of Europe Development Bank, the Nordic Investment Bank, and
Italy’s Cassa Depositi e Prestiti bank have each announced COVID-19 social bonds focused on health care
and direct lending for small businesses. As it becomes clear that more funding is needed for economic
recovery than even the strongest national efforts can provide, investors have a key role to play. “These
social bonds could be both an early signal and a catalyst that will enable private investors to play a
meaningful role in the pandemic recovery,” said Robert de Jongh, a specialist leader of social finance at
Deloitte.

The International Finance Facility for Immunisation (IFFIm) is credited with producing the world’s first
social bond in 2006, which increased the availability of vaccines for illnesses such as yellow fever and
polio in developing countries. The organization is considering a new bond to fund global research and
deployment of a coronavirus vaccine, IFFIm board chair Cyrus Ardalan told Foreign Policy.

Low levels of corporate issuances have had limited growth in the social bond market for years, but the
coronavirus could change that. Governments, multilateral organizations, and financial institutions
typically account for the majority of issuers. But for the sector to flourish, companies must participate so
overall liquidity can increase. Denise Odaro, the IFC’s head of investor relations, said on a recent podcast
that the problem lies with the nature of social issues: Green bonds have benefited from the momentum
around climate change, while investors view social causes more subjectively.

The COVID-19 response is a social cause that all market players can
agree on.
But the COVID-19 response is a social cause that all market players can agree on, Odaro said. Just as
green bonds have fast-tracked reductions in global carbon emissions through the financing of
reforestation and renewable energy projects, social bonds can speed up the pace of economic recovery by
industries affected by the pandemic and maintaining basic services.

While innovative finance has the potential to be leveraged across different economies, monitoring the
scope of its impact is critical.

Until investors have a clear framework for measuring outcomes, they are likely to remain cautious. The
IFC recommends that social bond issuers examine impact through qualitative indicators such as the
number of jobs saved or availability of COVID-19 tests. But that’s hard to do in crisis situations, said Gayle
Peterson, a specialist in social investing at the University of Oxford. “Coming up with targets for this
pandemic can be difficult when you don’t have enough masks or ventilators for immediate use.”

Durreen Shahnaz, the CEO and founder of the Singapore-based Impact Investment Exchange, highlighted
the importance for social bonds to include the perspective of their beneficiaries. For example, the bulk of
COVID-19 responses across countries “have been carried out without an eye to its impact on the world’s
most vulnerable community—women,” she said. “Yet women are bearing the brunt of the pandemic due to
their outsized role at the front lines of health care delivery and at the backbone of their families.”

Furthermore, complications arise when issuers mix social causes into other bonds. Since February, scores
of Chinese companies have sold so-called “virus control bonds” that commit a minimum of 10 percent of
their proceeds to epidemic control efforts. But many experts worry that the funds are actually helping
issuers avoid default—a concern that is beginning to extend globally as the ratings agency S&P warns of a
10 percent spike in U.S. corporate default rates over the next year.
The months ahead will likely see a wider range of sustainable financial initiatives dedicated to the COVID-
19 response, including impact investment funds and pay-for-success (PFS) models. In PFS models,
investors are paid out by a third party only if agreed-on outcomes are achieved—making them far riskier
than social bonds. It’s unclear how appropriate PFS programs are for the current crisis since they need a
clearly defined results metric that can be measured over the bond’s lifetime.

The coronavirus outbreak will likely motivate more governments, companies, and international bodies to
lean toward social financing. The Spanish bank BBVA estimates that global issuances of green, social, and
sustainability bonds will reach $320 billion in 2020—a year over year increase of 28 percent—and the

pandemic is set to accelerate that pace. In the span of a year, the Council of Europe Development Bank
preserved more than 40,000 jobs through a social bond it launched in April 2019. If private investors buy
in, the same could happen with the current tranche of coronavirus bonds—giving capital markets a crucial
role in recovery from the pandemic.

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