A pandemic-era boom in debt backing social causes is already fading as other types of bonds jostle for supremacy in a fast-moving ethical market.

Governments that had propped up Covid-ravaged economies by issuing social bonds are now turning their attention to longer-term climate goals, while companies are keen for increased flexibility when spending proceeds from sales of environmental, social and governance (ESG) debt. That’s crimping the flow of social notes that typically fund specific projects such as job creation or affordable housing.

Sales of social bonds in Europe have plunged 60% so far this year to 10.9 billion euros ($12.3 billion) and it’s a similar picture in the U.S., according to data compiled by Bloomberg. By contrast, issuance of sustainability and sustainability-linked debt is booming, with volumes more than doubling to 16 billion euros from the same period a year ago.

It’s a global phenomenon that’s expected to continue. Moody’s ESG Solutions expects worldwide sales of social bonds to fall 25% this year to around $150 billion, even as it sees green bonds driving a record $1.35 trillion in overall ethical issuance.

“We are seeing a return of focus to green because some Covid-related spending has declined,” said Anne van Riel, the head of sustainable finance capital markets for the Americas at BNP Paribas SA, this year’s top underwriter of green bonds. “This year we expect companies, which have issued fewer social bonds, to incorporate social elements in sustainability bond issuance.”

The social bond market was ignited by the pandemic and from a push for equality in the wake of protests over #MeToo and the killing of George Floyd. At the height of its appeal in 2020, the European Union smashed bond market records with a 233 billion-euro orderbook for its first social sale to fund employment. In the U.S., Citigroup Inc. brought the largest-ever social bond deal from the private sector to fund affordable housing.

These deals were expected to prompt more of a follow-on impact, including in emerging markets. While issuance jumped last year in some nations, such as Chile and South Korea, Ghana postponed a planned $2 billion offering to fund budget programs from education to health. State agencies such as France’s CADES are still significant sellers, yet developed-nation governments so far have barely issued any social bonds.

“There’s a huge focus on environmental with climate change, and net zero and green bonds, etc. But, you know, there’s not really the focus on the S of ESG,” said David Zahn, head of sustainable fixed income at Franklin Templeton.

Lack Of Projects
A lack of viable specific projects on which to use social bond funding has proved a key stumbling block for the market’s development. It’s difficult for some companies to create enough projects targeting minority groups to issue a pure social bond at a benchmark size, said BNP’s van Riel.

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