A recent research note from BNP Paribas recognised that digital bond liquidity remains limited as investors ponder a fragmented market with multiple tokenisation platforms and an evolving regulatory framework.
The benefits of issuing a security in electronic form as a centrally registered security are limited compared to issuing a bond evidenced by a (traditional) global note explains Thomas Jost, Head of Corporate Debt Capital Markets D/A/CH at Deutsche Bank.
“It precludes obtaining higher visibility on the investor base and at the same time does not significantly accelerate the documentation and settlement process,” he adds.
In accordance with the EU Listing Act, supplements of issuance programmes cannot be used to introduce new types of securities for which the necessary information has not been included in the base prospectus.
“It is possible that the introduction of a digital bond to an existing programme can be categorised as such,” says Valérie Ghesquière, Head of Corporate Debt Capital Markets EMEA at ING. “Therefore, creation of new documentation might be needed, which can be expensive and cumbersome.”
Despite these challenges, some forward-thinking corporates have taken the plunge. The highest profile digital bond issuer is German multinational technology conglomerate Siemens, which in September 2024 issued a second digital bond in accordance with Germany’s Electronic Securities Act.
The bond had a volume of €300m and a maturity of one year and the securities transaction was settled via the private permissioned blockchain of German fintech SWIAT and the Trigger Solution provided by the Bundesbank, making it possible to settle the bond within minutes and in central bank money.
When asked whether there are any aspects of the digital bond issuance process that are particularly challenging, Siemens refers to the need for harmonisation of national and European regulation. It also notes that digital bonds issued in a decentralised cryptosecurity register cannot be listed on a stock exchange as this would require a central securities depositary as per the EU Regulation on Central Securities Depositories.
“Automated processing within a few minutes shows the enormous potential of this new technology,” says Peter Rathgeb, Siemens Group Treasurer. “Last year’s €60m digital bond issuance required a two-day settlement period. As a result, this time the settlement risk was almost fully eliminated for all parties involved.”
On the question of whether there is sufficient availability of advisors with knowledge of this type of bond issuance, Rathgeb says he expects an increase in advisory services as the scale of digital bond issuance increases.
Proponents of social bonds refer to their potential to fund projects with positive social outcomes. However, Shubha Samalia, ESG Macro Strategist and Alvaro Vivanco, Head of ESG Macro Strategy at NatWest, note that issuance volumes have broadly stagnated since the first quarter of 2021.
They refer to a shortage of investment products, concerns about diversification and fears of ‘social washing’ as the main barriers to greater issuance.
“In most cases, social bonds are used to finance projects in the areas of education, healthcare, affordable housing and basic infrastructure,” says Mirko Gerhold, Head of Corporate Bond Origination & Solutions at Commerzbank. “Given that these social areas are usually financed by the public sector and in some cases by banks, we only rarely see social bond issuance by corporates.”
Challenges facing corporates looking to issue social bonds include defining eligibility criteria and quantifying social impact at the issuer level suggests Hayley Basterfield, Global Head of Bond Syndicate & Liability Management at Lloyds Banking Group.
“Social bond frameworks show variety in eligible activities and associated metrics, covering themes such as job creation, affordable housing or healthcare access,” she says. “Greater understanding of social eligibility criteria and impact measurement, regulatory support and strong investor demand will help support more corporate participation.”
With the typical transaction size being at least €500m, the limited supply of corporate social bonds is also a matter of feasibility. Classifying this amount of expenditure to address social inequities suffered by a specific population is a challenge for most companies – apart from those active in healthcare and social housing.
Ghesquière explains that any issue size smaller than €500m has an impact on liquidity in the secondary market and hence investors are less willing to put their money to work for these sub-benchmark trades. In addition, very few investors have dedicated strategies focused on social bonds.
Last year’s €60m digital bond issuance required a two-day settlement period. As a result, this time the settlement risk was almost fully eliminated for all parties involved.
Peter Rathgeb, Group Treasurer, Siemens
“Another consideration is that expectations by investors concerning eligible categories and expenditures are still less standardised compared to green expenditures,” says Boris Kopp, Head of Capital & ESG Solutions EMEA at Deutsche Bank.
But there are signs that European companies in particular are warming to social bonds. For example, Finnish learning and media company, Sanoma Corporation, issued its first social bond in September 2024, raising €150m.
“The bond helps us to emphasise the positive impact our learning business has on society, which is otherwise difficult to measure or quantify,” explains SVP Group Treasurer, Sirpa Louhevirta. “The social element in the bond also attracted investors that might otherwise not have invested in our unrated bond, improving the order book and tightening the pricing somewhat.”
When Sanoma started to plan the issuance it held discussions with a small number of banks to understand the potential options available in the market.
“During the discussions, the unique option of the social bond became evident,” says Louhevirta. “As it was introduced and strongly recommended to us by Swedbank, they were an easy choice for the advisor role for the framework and acted as joint lead manager – with Nordea Bank – in the issuance. We also spoke to several second party opinion providers, of which ISS had the widest experience in similar type of frameworks.”
In April 2024, German residential real estate company Vonovia issued a ten-year unsecured social bond with a total volume of €850m, which was almost five times oversubscribed.
“This bond is proof that we can combine our social responsibility with our excellent access to the capital market,” explains CFO, Philip Grosse. “We took advantage of the very strong market environment opportunistically with the only euro bond on the market.”
The proceeds of the bond – the second social bond issued by the company following a similar issuance in 2022 – will be used for occupancy-based apartments for low income households, affordable housing and apartments with minimal entry requirements.
Vonovia believes social bonds help transfer socially responsible behaviour to the capital market and that they have achieved a similar level of acceptance to green bonds and can keep up in terms of price.
Itaú BBA’s Head of Debt Capital Markets, Luiza de Vasconcellos, refers to growing interest in blue bonds (a debt instrument that raises funds for projects that benefit the ocean and climate). “In Brazil, one of the sectors that has a natural social vocation is sanitation, so we have seen a number of blue issuances, many of which have social components,” she says.
The mood music around green bonds from an investor perspective is largely positive. Matthew Toole, Director of Deals Intelligence at LSEG Data & Analytics recently observed that the first three quarters of 2024 had been the strongest nine month period for green bond issuance since records began in 2015 despite headwinds from political uncertainty and regulatory change.
Since 2021, the value of green corporate bonds has been more than that of carbon-intensive corporate bonds in nearly every calendar quarter until Q324. This makes Italian sustainable energy company A2A’s placement of the first European Green Bond by a European corporate issuer in January particularly significant.
The €500m bond with a ten-year tenor was more than four times oversubscribed.
A company spokesperson explains that the bonds are subject to specific reporting and transparency requirements, ensuring that the funds are being used for the intended environmental purposes and envisaging the annual reporting of the environmental impacts.
“One of the biggest challenges is clearly defining what qualifies as ‘green’,” she says. “There is no universally accepted standard for what constitutes a green project or investment. The development of the EU Taxonomy is a step forward in clarifying what is considered environmentally sustainable though.”
She also acknowledges that the issuance of green bonds may involve additional costs for legal, structuring and certification services. Issuers need to demonstrate that the projects align with green objectives, which often requires detailed documentation, analysis and external opinions to gain investor confidence.
The social element in the [social] bond also attracted investors that might otherwise not have invested in our unrated bond, improving the order book and tightening the pricing somewhat.
Sirpa Louhevirta, SVP Group Treasurer, Sanoma
Investors in green bonds typically expect ongoing transparency regarding the environmental impact of the funded projects. Issuers therefore need to provide clear, credible reporting on how funds are used and the environmental outcomes achieved, and this can require significant additional effort, time and resources to track and report performance and also involve a third party verification provider.
“There is increasing availability of knowledgeable advisors, represented currently mainly by ESG advisory teams of the major banks,” adds the A2A spokesperson. “The advisory landscape is rapidly evolving, so the supply of skilled advisors will likely continue to grow as the sustainable finance sector matures.”
One step companies can take to make their green bonds more appealing to investors is to target investors with specific mandates.
“The more demand we have for these instruments, the more appealing they can be to the issuer from a pricing perspective,” says de Vasconcellos. “ESG investors tend to have a buy and hold profile, which tends to also be positive for issuers and support the issuer’s bond secondary levels during periods of volatility.”
Gerhold observes that although a growing number of corporates have adopted climate transition plans, some choose not to issue in sustainable format but rather to take a holistic approach to sustainability in general.
Gender-focused sustainable bonds have been described as useful instruments to finance projects to support gender equity, encompassing issues related to female empowerment, advancement and equality.
But this is another area where corporates lag sovereigns, supranational and agencies in terms of issuance. According to Amundi, companies account for only 14% of gender bond issuances as the market grapples with a lack of clear guidance around issuance of (and investment in) gender-focused fixed income instruments.
Ghesquière adds minimum volumes to the list of challenges. “Sustainability-linked could be a nice option, but ultimately investors still expect and will focus on climate and green KPIs for these instruments,” she says. “It is generally much easier for financial institutions and sovereigns, supranational and agencies to address the social topic and thematic topics within the social universe, including gender.”
Itaú BBA is not aware of any institutional investor with a clear gender mandate for use of proceeds bonds, observes de Vasconcellos.
“The cases we have had in Brazil relating to gender were mostly in the sustainability-linked bond format using gender targets, which is different from having a gender use of proceeds,” she says. “Demand for use of proceeds gender bonds normally come from development financial institutions and multilaterals, in line with their strategic goals.”
Generally, this market has been nascent with development banks playing a role in the past, concludes Kopp. “We haven’t seen this market growing substantially over recent years.”
