Social at the Center of ESG - NEWS - Sodata Analytics Foundation Association

Social at the Center of ESG

BY DEL ANDERSON, OLIVIA A. ALBRECHT, PIMCO

Updated on July 13, 2020

As we actively engage with bond issuers through this pandemic-driven economic crisis, we see five major social themes affecting creditworthiness and driving new social bond issuance. The social pillar of environmental, social, and governance (ESG) investing is all about people: employees, customers, and suppliers. The outbreak of COVID-19, followed by global demonstrations calling for action on racial injustice and social inequality, has propelled the S of ESG to the top of corporate and investor agendas.

This is arguably the clearest example of a sustainability crisis in the 21st century, and has highlighted how interconnected, interdependent, and vulnerable the world can be. Moreover, this crisis is disproportionately affecting the most vulnerable communities in the world, exposing and exacerbating the impacts of inequality in many regions.

A renewed focus on the S of ESG investing

Material social issues include health and safety, human capital management and product quality, but inequality and supply chain management are especially top of mind right now. Many companies are increasingly managing their business models with an understanding of the multiple stakeholders in their ecosystem.

It is clear through dialogues with our global clients, issuers, and policymakers that the current crises facing the global economy will only sharpen the focus on how businesses interact with all stakeholders. Reflecting this, we expect greater transparency going forward on social dimensions, which would be a welcomed development. As investors, we are committed to encouraging greater transparency from companies.

Watching recent events unfold, we also recognize our research and engagement approach should continue to improve. PIMCO is committed to deepening our analysis of material social factors into our fundamental research, while engaging companies on issues of equality, diversity, and human capital management. Moreover, we are active in building and driving greater social bond issuance, particularly social bonds seeking to address near-term COVID-19 response and recovery efforts for disadvantaged groups.

Deeper dive: trending ‘S’ factors

As we actively engage with bond issuers, our credit research team is tracking five major social themes that have emerged with the outbreak of COVID-19. In many cases, these themes affect creditworthiness and drive new social bond issuance.

1. Health and well-being are key priorities: First and foremost, many companies have responded to ensure workers, especially those in essential industries, have equipment and space needed to operate safely. Beyond physical protections, many companies are also improving healthcare options and benefits to better cover peoples’ needs; approaches include telehealth, mental health counselling, and child care.

2. Work is being reallocated: Tens of millions of people in the U.S. alone have filed for unemployment, and a much higher number are estimated to be out of work globally. Hourly wage, service workers, people with children, and minorities appear to be disproportionately affected. It is unrealistic to think that all of these workers will return to the same job, in the same capacity. There will likely be winners and losers in the redistribution of work as the recovery progresses.

3. The way many people work may change permanently: According to a recent Gallup poll, more than 60% of employed Americans now say they have worked from home during the pandemic, up from about 30% before widespread “shelter-in-place” orders. A recent Gallup poll reported three in five workers say they prefer to work from home as much as possible even after public health restrictions are lifted. Employers are starting to think differently about working styles and benefits, with greater flexibility becoming a higher priority.

4. Supply chains will need to be derisked: Simplified, transparent supply chains are critical to spotting and managing production stoppages. A key outcome of PIMCO’s most recent Cyclical Forum was that firms may try to reduce the risks and complexity of global supply chains, with a key step being improved transparency beyond large, first-tier suppliers.

5. Cybersecurity and privacy defenses will increase in importance: A sharp increase in employees working remotely and customers shopping online increases risk levels for data and privacy breaches. A recent Verizon report noted VPN usage is up over 80% and collaboration tool usage is up over 1,200% compared to a typical pre-COVID day. Many companies are focused on making the accelerated transformation to digital safer.

The bottom line is that many companies will require capital to successfully manage these five social themes, and we believe that many will come to the bond market to raise capital through debt financing. We are committed to actively engaging with companies through this crisis.

Investing for impact: social bond issues linked to COVID-19 response and recovery

Bond markets have responded to financing needs of issuers for COVID-19 response and recovery via social bond issuance. Social bonds raise funds for new or existing projects targeting positive social outcomes. Companies, sovereigns, and development finance institutions (DFIs) are among issuers coming to market now with innovative social bonds aimed specifically at supporting economic and health recovery. (For more on DFIs and public-private partnerships, read this recent post on the PIMCO Blog.) This is a unique way for investors to invest in debt, which our assessment shows largely trades in line with an issuer’s existing credit curve, with proceeds being linked to measurable impacts.

This year has already set a record for social bond issuance, totaling over $20 billion raised for social projects globally. With increased focus on social issues from COVID-19, we expect a major uptick in social (and sustainability, blending green and social) issuance (see Figure 1). Well structured, credible social bonds are a unique market opportunity for investors to finance critically needed health and economic solutions.

Figure shows social bond issuance as a growing part of the total sustainable debt universe which includes green bonds, social bonds, and sustainability bonds that blend green and social factors. Sustainable debt issuance rose year-over-year from 2016 through 2019 and year-to-date issuance in 2020 as of 31 May 2020 is over $75 billion USD.

To us, a “well-structured” social bond clearly states the projects it funds are designed to benefit vulnerable, at-risk, or disadvantaged segments of society, and reports transparently on related outcomes. We see immediate need in sectors such as healthcare, pharmaceuticals, manufacturing, and small businesses (including lending to small businesses); this list could be expanded as we learn more about the economic consequences of COVID-19. Importantly, social bonds should be structured to meet immediate needs without compromising on long-term sustainability goals. Our view is that an effective way to achieve social, environmental, and economic goals is to link issuance to the Sustainable Development Goals (SDGs).

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