Social bonds: The Freddie Mac headquarters in Mclean, Virginia. Housing agencies have been responsible for the majority of the new deals of so-called social MBS, with Fannie Mae and Freddie Mac issuing a combined US$13.2bil. — Bloomberg
NEW YORK: A US$1.8 trillion corner of the sustainable debt market is defying the wider downturn, as investors snap up bonds largely backed by US government agencies even as Donald Trump leads a green retreat.
Sales of so-called social bonds, which direct proceeds to areas like health, housing and education, jumped about 130% to US$657bil globally last year, and continued at a similar pace in the first quarter, according to data compiled by Bloomberg Intelligence.
Issuance now rivals the traditionally larger market for green bonds, the data showed.
Social bonds have emerged as a shelter of sorts for environmental, social and governance (ESG) investors, as climate-related issues become increasingly contentious with Trump pulling green funding and promoting fossil fuels.
The bonds now have US$1.8 trillion outstanding, compared with green bonds at US$3.9 trillion.
The flow of social bond deals may continue “even if there is a backtrack on some climate commitments”, said Ulf Erlandsson, chief executive officer of Anthropocene Fixed Income Institute, a nonprofit that promotes debt markets to mitigate climate change.
Still, given the notes are based more on social constructs than science, there are risks the debt is “even more politically sensitive” in the United States, he added.
The surge in social bond issuance has significant ties to the Government National Mortgage Association (Ginnie Mae).
This follows the expansion in 2023 of the definition for the US agency’s so-called social mortgage-backed securities (MBS), which now allows investors to categorise Ginnie Mae MBS as social if they choose.
Ginnie Mae guarantees the principal and interest payments of MBS composed of mortgages for certain populations of homeowners, including veterans, low-income families and first-time homebuyers.
The US housing agencies have been responsible for a majority of this year’s US$149bil in new deals, with Ginnie Mae accounting for almost two-thirds of that.
Fannie Mae and Freddie Mac have issued a combined US$13.2bil.
France’s social debt fund, along with the International Finance Corp and Korea Housing Finance Corp, have also sold debt this year.
Banks underwriting social bond deals include JPMorgan Chase & Co and BNP Paribas SA.
Ginnie Mae is one of several government agencies targeted for cost cuts by the Trump administration, raising concerns about possible disruption in the mortgage bond market, Bloomberg News reported last month.
As many as a quarter of the agency’s 270-odd employees have either resigned or been dismissed, people familiar with the matter said at the time.
Social bonds took off during the pandemic to support small and medium enterprises, with government and supranational entities dominating sales.
Housing is the most common use of proceeds because it’s pretty easy to identify, said Nneka Chike-Obi, head of Asia-Pacific ESG ratings and research at Sustainable Fitch in Hong Kong.
The debt also is posting solid returns for investors. The ICE Social Bond Index has outperformed its green bond peer this year with a 3.4% gain.
Earlier this month, Standard Chartered Plc issued a €1bil (US$1.1bil) social bond for the first time to lend to small firms, including women-owned businesses across Asia, Africa and the Middle East.
Citigroup Inc said it expects social finance funding in Asia to rise by more than 10% this year as investor demand increases.
“Given the high frequency of issuance, this allows investors more engagement opportunities, thus impacting an issuer’s cost of capital,” said Shamil Gohil, co-manager of Fidelity International’s social bond fund. — Bloomberg
