Stockholm (NordSIP) – With the death toll continuously increasing and amid concerns that Africa will be the next focus of the COVID19 pandemic after the USA, financial resources have been galvanised to help this global threat that is bringing the world to a halt.
Recent activity in sustainable fixed income markets as well as insights from the front lines from asset managers, suggests that while there is much that asset managers and asset owners can do to contribute to the fight against COVID19, uncertainty remains.
Uncertainty Prevails Despite Policy Action
“The number of infections in many countries is still rising and, with the exception of China, the end of containment measures is not in sight,” Hans Stegeman, Head of Investment Analysis and Economics at Triodos Investment Management, tells NordSIP. “The current effects of the COVID19 pandemic on the real economy are severe as a result of containment measures, which have a big impact on economic activity in many countries. The ultimate economic effects will depend on how long a lockdown or containment measures will be in place and the responses from central banks and governments.”
This view is echoed by other investors. “Currently, it is too early to assess the adverse impact that the outbreak of COVID-19 will have on valuations or performance,” Raymond Jacobs, Managing Director at Franklin Real Asset Advisors (FRAA), added. “These events have already begun to significantly disrupt economic growth and continue to cause severe volatility in capital markets.” Stegeman agrees, adding that “we have already seen drastic actions, even more stimulus than in the great financial crisis (GFC), but we doubt if it is enough to counter the demand outfall. It is very likely that we will have a more severe global recession than in the GFC.”
Social and SDG Bonds To Fight COVID19
The response from policy markets has echoed through to financial markets. response In fixed income as well as in equity markets, the convention has been for these efforts to fall under the remit of the “S” in ESG. In this context, we have noticed frenetic activity in the Social bonds market lately. On March 19th, Alecta, Folksam and Länsförsäkringar appear to have swooped up all of the International Finance Corporation’s (IFC) SEK3 billion social bond to provide financial support and loans to companies adversely affected by the spread and turmoil linked to COVID19. At the end of last week, Pfizer issued a US$1.25 billion ten-year “sustainability” bond aimed, among other goals, at fighting the pandemic.
However, this week saw multinational and regional developments banks go on overdrive. On March 27th, the African Development Bank launched an inaugural US$3 billion “Fight COVID-19” Social Bond. On March 30th, the Nordic Investment Bank (NIB) issued its first, €1 billion NIB Response Bond, whose funds will be channelled to social and economic projects related to COVID19 in Sweden, Norway, Denmark, Iceland, Finland, Estonia, Latvia and Lithuania. On the same day, the Inter-American Development Bank issued a US$2 billion sustainable development bond (SDB), with funds channelled to the healthcare system, social security and fiscal policy. The day after, the European Investment Bank followed suit, issuing a SEK3 billion Sustainable Awareness bond aimed at supporting healthcare services and businesses throughout the COVID19 crisis.
COVID19 and Social Infrastructure
“For real estate, in particular, we believe that it will greatly diminish transaction volumes and moderate near-term leasing and financing activity, as well as adversely impact operating performance at the asset level in certain sectors (such as hotels, discretionary retail and leisure) and specific locations,” FRAA’s Jacobs argues.
“We expect social infrastructure as a defensively-positioned sector, with long-term stable and inflation-linked cash flows as well as its lower correlation to GDP, to outperform the broader real estate market over this period,” Jacobs adds. “We also believe that the significant disruption to markets will provide attractive buying opportunities with significant opportunity to provide much-needed capital for social infrastructure and create a positive impact in communities as they recover.”
Exceptional Measures to Cope With the Pandemic
Given the types real estate holdings that Jacobs has described to NordSIP in the past, we were particularly keen to hear what effect the crisis has had on the asset manager and what measures have been taken to navigate the present situation. “Each of our tenants has taken their own procedures, as per their respective government guidance, to protect their staff, patients, students and their overall operations,” Jacobs says
“For our healthcare assets, for example, this has included the suspension of outside visitors, temporary closures of the outpatient facilities, restricted admissions of new patients for the time-being and ensuring that employees wear masks and eye goggles where necessary to protect from the possibility of transmission,” Jacobs explains. For our education properties, the focus was on increased awareness and information regarding preventive policies and procedures until school closures were stipulated and distance education took over.”
“The communication and dialogue with our social infrastructure tenants are ongoing and a number of initiatives are currently being implemented or discussed. These include, temporary relieve of rent payments, financial support to secure additional safety and security measures as well as the potential of providing currently vacant space for essential services and key workers where needed and possible,” Jacobs says.
The Time for Impact Investing is Now
“The economic implications of this global pandemic will have a big effect on many economies, especially in emerging markets,” Stegeman explains. “Now, more than ever, it will be very relevant to invest with impact, especially to ensure that people in emerging markets will continue to have access to basic financial services.”
“That is where we have an important role to play in the months or maybe even years to come and where we can make a difference with our experience and track record in financial inclusion.”
Looking Beyond the Vulnerable Economic Model
“This all shows that the economy is very vulnerable. We have built a very efficient, but not resilient system. We lack buffers (economic, social, ecological) in our economic system,” Triodos IM’s Stegeman tells us. As a result, he explains, “when economic activity falls, it all breaks down.”
“The result is that our economies now heavily depend on government intervention. This huge help, sometimes in the form of cash for citizens but mostly credit and temporary aid, will, in the end, result in high public and private debts. Even higher than the record highs we already have.”
“So, when the corona crisis is over, our unsustainable economy will probably become even more unsustainable,” Stegeman warns. “Therefore, we hope that not everything will return to normal, but that we will find a way to come out of this crisis with a plan to transition into a more sustainable, less growth-dependent and more resilient economy.”