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Being sociable

27 February 2019
Richard Kemmish

The growth of green covered bonds, though laudable, has overshadowed the potential for other types of socially responsible securities. I think we need more of a debate about this.


Although they didn’t know it at the time, HBOS launched the first ever ESG covered bond in 2005. They didn’t know it because it was long before the acronym ESG had even been invented (Environment and Social governance, do try to keep up). The programme that they launched was based on their loans to social housing providers in the UK. British social housing, like that in many countries, is provided by a complex mixture of specialised legal entities (such as housing associations) and others who provide social housing incidentally to their main business (including charities and local authorities), many of them were funded by HBOS. 

HBOS did not launch the bond and investors did not buy it for altruistic reasons. It was just a convenient way to finance some very safe, very long dated assets in a way that wasn’t possible in their regular covered bond programme, would allow better matching of their asset and liability paydown schedules and allowed a more appropriate credit mechanism than that used for residential mortgage covered bonds. The fact that the underlying assets had ‘social value’, as it would now be called, was incidental

One key difference between the transaction and most of the more recent ones in the sector was that the bond was based on a distinct pool of assets and was issued off a different programme from HBOS’ other covered bonds. More recent ESG covered bonds use an administrative rather than a legal division to segregate the assets that meet the criteria. If 10% of my loans are green, then so are 10% of my bonds. In insolvency any given green bondholder has no more or less of a claim over the green assets than any regular covered bond holder. By segregating the assets into a different pool HBOS had a clearer linkage between funds raised and assets funded and offered investors a theoretically different risk/return profile to that of other covered bonds.  Important, that.

One of the great strengths, and weaknesses, of the ICMA green bond principles is that it is mainly about the process, the selection of assets, the ringfencing of cash and so on. It does not focus on the definition of greenness itself. It’s a great strength because the principles can easily be applied to outcomes other than green ones – UN sustainability goals, social governance rules, whatever it is that issuer and investor want to target.  That its ‘process focus’ is at the same time a weakness is for obvious enough reasons. For our purposes though we have a ready-made framework. The green bond principles can very easily become the social housing principles for example.

What of the two ‘social covered bonds’ launched to date, one from Spain, one from Austria? They used similar but not identical definitions of what it was that they were trying to fund.

If it is difficult to define ‘green’ to everyone’s satisfaction (is nuclear green? Some say yes because it doesn’t emit greenhouse gases, others say no for obvious reasons), it is even more difficult to define ‘social housing’ outcomes or, for that matter, sustainable development objectives with their very obvious potential to contradict one another.

Difficult. But the huge need for funding in the social housing sector means we should at least try.

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