If you are seeking to increase exposure to socially responsible investments (SRI) and want to aid the coronavirus recovery, there is a bond for you. A new breed of social bonds is mobilizing investment dollars to fight the pandemic. The corona, or COVID-19, bond invests proceeds in the development of vaccines, healthcare, and other COVID-19 initiatives with a positive social impact.
As this new asset class takes off, should you invest in mutual funds and ETFs with corona bonds? The new social bond belongs to two of the safest asset classes: sovereign-government backed bonds and socially responsible investing.
If you want to invest in a corona bond, the following are some bond screening guidelines to lower your investment risk.
1. Socially Responsible Investment Screens
Like other social bonds, the proceeds of corona bonds are dedicated to supporting social issues. Green bonds dominate this investment space. Corona bonds now want to share in the social investor love for doing good.
The socially responsible investment sector has traditionally outperformed the broader stock market. SRI beats the rest because SRI investors apply more conservative and extensive stock screens. In addition to standard fundamental investment analysis, SRI investors screen for environmental, social, and government (ESG) goals. The companies that meet this ESG criterion tend to have superior operating performance.
2. Social Bond Screens
For social bonds, issuers voluntarily adhere to additional criteria under the Social Bond principles. They are:
- proceeds invested in social projects with clear social outcomes (e.g., health, employment, and housing are three of the top categories targeted by corona bonds)
- transparent project evaluation and selection process
- transparency in managing proceeds targeted to social impact projects
- timely and transparent reporting
3. Creditworthiness Ratings
About 77% of social bond issuance is generated from government and supranational agencies such as the IFC and African Development Bank. Pfizer offered a $1.25 billion corporate sustainability bond in April, whose proceeds are partly targeted to coronavirus drug and antimicrobial resistance drug development. The majority of social bond issuance falls between a AAA–A rating.
The investment interest in corona bonds is staggering. Social bonds comprised 6.5 percent of all sustainable bond issuance of $608 billion from 2016–2019. In the first five months of 2020, investors sank over $150 billion into corona bonds.
For investors wanting to support the corona recovery, corona bonds provide an opportunity to have a social impact and the potential to earn above-market investment returns. Large pension funds and private equity funds are starting to invest in the corona bonds. Eventually, fund managers will allocate them a space beside green bonds in mutual funds and ETFs. Your socially responsible investment advisor can advise you on how to invest in this popular new social bond.