Bank of America has become the first US bank to issue a social bond. At the end of January, the bank issued a $500 million four-year (non-call three) bond that priced at 78 basis points over US Treasuries. The proceeds will be used to finance the bank’s current portfolio of affordable housing and lending to Community Development Finance Institutions (CDFIs).
Suzanne Buchta, managing director and global head of ESG Capital Markets at Bank of America Merrill Lynch, notes that the bank’s experience in issuing green bonds made the process relatively smooth. Bank of America has issued four green bonds, including a $2.25 billion issue in May last year. Buchta says she hopes other banks will follow suit. The demand is certainly there – Buchta says the deal was six times oversubscribed, pricing well in from the initial price talk of plus 95bp to 100bp.
Andrei Magasiner, treasurer of Bank of America, says that the bank’s social bond and green bond programmes have offered access to investors that would not typically be its funding sources. There was significant European participation in the bond, for example, which would not usually be the case for a US dollar-denominated issue.
“Our goal in treasury is to open up channels of financing and have some pricing power and these bonds allow for that, in addition to fulfilling our responsible growth and community investment commitments,” he says. “Issuing a social bond demonstrates that the bank is truly committed to the needs of the communities we serve.”
Magasiner adds that there are lots of assets on the bank’s balance sheet that could meet the UN Sustainable Development Goals (SDGs) and that it is looking at how those could be financed under the umbrella of sustainability bonds. Given BAML’s large portfolio of affordable housing, and the demand for social bonds, he expects the bank to issue again at some point.
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Simon Bond, Columbia |
Simon Bond, manager of the Threadneedle UK Social Bond Fund at Columbia Threadneedle Investments in London, says he is hopeful that banks, and other corporates, will tap this market more regularly.
“The beauty is that you’re buying the exposure of the corporate so the credit risk is easily understood,” he says. He adds that such bonds allow investors to get exposure to only the activities of a corporate that are good for society or the environment.
“While you can’t lose sight of a corporate’s overall governance, the targeting is useful for investors like us – and we are many – who are looking to specifically support certain behaviours and projects,” he explains.
Corporates and agency and government issuers of sustainability bonds may start to see differentiated demand for sustainability projects as a consequence. “Ultimately they could end up seeing a higher cost of capital in the issuance of a regular bond,” Bond points out.
With regards to the finance sector, Magasiner agrees that it could become a means for the asset management industry to influence the types of financing a bank does. Essentially the benefits that sustainability bonds offer an issuer would incentivize them to reassess their lending book. “It is a means for society to advocate for a sustainable composition of the asset side of a bank balance sheet,” he says.
Encouraging
Other investors are seeing social bonds as a means to tackle the UN SDGs. Andrew Russell is the director of fixed income investments at the Pension Boards of the United Church of Christ (PBUCC), which invested $10 million in Bank of America’s social bond. Of its $1 billion invested in fixed income assets, nearly $250 million is in sustainable bonds, with more than $200 million invested in green bonds and $45 billion in social bonds. PBUCC is a member of both the Green Bond and Social Bond Principles.
Bond says he is actively encouraging banks to issue social bonds. “We need a conduit that can borrow big and lend small – a bank that has a large loan book that can be carved out into socially-positive lending that can end up giving us access to small business loans, for example, that are the engine of economic growth, or to loans to women or loans to minorities. We want access to that kind of lending.”
Russell says the board is thinking about ways it can support the SDGs through its fixed income portfolio, and that the BofA social bond aligned with that mission and its investment guidelines.
He says the PBUCC fixed-income team is also optimistic that social bond issuance will increase. “More investors are recognizing the benefits of investing sustainably. Faith-based, as well as other investors, continue to avoid ‘value offenders’ via exclusionary screening, but now also emphasize their preferences for bond issuers whose values are aligned with their own.”
The Board has also invested in other socially-minded bonds, including those issued by Starbucks and HSBC, as well as the International Finance Corporation’s Social Bond that provided financing for projects that benefit women-owned enterprises and low-income communities in emerging markets.
PBUCC is also in discussions with similar investors and a development institution regarding the creation of a social bond issue whose proceeds would benefit the extreme poor living in conflict-affected situations.
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