Social bonds could help to provide much needed capital to fund responses to the crisis, writes Dr Edana Richardson and Dr Aisling McMahon in the Department of Law
The rapid spread of Covid-19 has required governments to react quickly. At the time of writing, there have been nearly 177,000 deaths reported globally, with 16,671 cases and 769 deaths in Ireland. Alongside its devastating health consequences, the coronavirus has had significant economic consequences. With millions of individuals worldwide confined to their homes and unemployment rates rising globally, there are predictions that the economic downturn this year will be the worst since the Great Depression.
This social and economic impact has led to huge sums of money being pledged by governments to support healthcare and struggling economies. Faced with this pressing need for funding, governments have had to reconsider suitable financing avenues. One option is to issue social bonds.
What are social bonds?
A "bond" evidenced by a bond certificate represents a debt owed by an issuer (the entity raising money - this could be a sovereign state, supranational/multilateral organisation or corporate) to the holder of that bond. This debt is typically repaid at maturity of the bond, while interest payments may be paid during the bond's lifetime.
While many bond issuances are designed to raise money for the issuer's day-to-day activities, some are explicitly framed to provide funding for socially responsible projects meeting environmental, social or other ethical criteria. Within this category of bonds, "social bonds" provide funding for projects seeking to address identified social issues or achieve positive social outcomes. Used in this way, social bonds provide the issuer with upfront funding and allow investors to invest in line with their social beliefs.
Bond issuances that carry the label of "social" are frequently structured to align with voluntary guidelines, most notably the International Capital Market Association's Social Bond Principles. These aim to encourage transparency and standardisation in social bond issuances, and adherence to these standards has become a hallmark of many international social bonds. Qualifying projects include those providing affordable infrastructure and access to essential services including healthcare.
Social bonds and the coronavirus
As Covid-19 represents a crisis of global relevance, there has been an increase in social bond issuances designed to finance projects addressing the social and economic impact of the pandemic. On March 11th, the International Finance Corporation, a development institution and member of the World Bank group, issued $1 billion worth of social bonds to raise money for social projects, including projects providing access to healthcare, and to support private companies impacted by Covid-19.
An introduction to IFC's social bonds
This was followed by an issue of $3 billion worth of social bonds by the African Development Bank to provide support and finance to countries and businesses to curb the spread of Covid-19 in African communities. The Council of Europe Development Bank most recently issued €1 billion worth of COVID-19 Response Social Inclusion Bonds. With this money, the Bank will offer loans to member countries for financing/refinancing eligible projects, including healthcare projects to address Covid-19.
To date, social bonds have been issued primarily by developmental organisations who provide funding to help governments and companies address the impact of the pandemic. However, it seems likely that issuances of social bonds by sovereigns and corporates with strong credit ratings are imminent. There are compelling reasons for states like Ireland to consider social bonds as a source of funding in this context.
Social bonds for Ireland?
At the end of March, Ireland pledged €6.7 billion worth of measures to address the economic and social impact of Covid-19. In the healthcare context, Ireland has already offered significant support, including an initial pledge of €435 million for the HSE. However, uncertainty remains around how the pandemic and potential vaccines will develop. This uncertainty has knock-on economic implications. Accordingly, with costs continuing to rise, more funding may be needed, with some predicting that the total cost to the Irish government from Covid-19 could be as high as €30 billion.
Funding for health services is vital to save lives threatened by Covid-19, and Ireland's human rights obligations in the health context should also be borne in mind. The right to health is, for example, recognised under several international treaties including Article 12 of the International Covenant on Economic, Social and Cultural Rights, which provides that everyone has the right to "the highest attainable standard of physical and mental health". Moreover, alongside funding healthcare infrastructure and services, health inequalities must be considered as Covid-19 poses greater risks for vulnerable and impoverished groups.
For Ireland, the issue of social bonds through the National Treasury Management Agency could provide an avenue for leveraging funding to specifically address healthcare costs and employment/social issues arising from Covid-19. Finance raised by these bonds could also be used to mitigate social-determinants of health such as poverty.
But while the NTMA recently issued bonds to boost Ireland's finances as it responds to Covid-19, this was not an issue of social bonds. As a result, funds raised will not specifically be directed towards funding social projects, the social aims of funded projects will not be independently verified, nor will investors receive updates on the social impact of their investment. The issuance of labelled social bonds by Ireland would have such advantages and would be a strong indication of the Irish government’s commitment to helping the public and private sector weather the consequences of the pandemic. It would also enable the Irish government to access a section of the investment community that invests on a socially responsible basis.