In an age where social bonds are catching the headlines, one such investment may have slipped below the radar and yet could present a great opportunity for both company finance departments and investors.
Gender equality bonds are a way of making sure that equal opportunity is a priority in the businesses that investors back. Calling for more women on the board is now very much old school. This relatively new form of debt means investors can have an even larger influence on the companies into which they sink their capital.
Despite the turmoil in the US with the #MeToo campaign, it is Australia which has been leading the way. In March 2017 the National Australia Bank sold AUS$500m of gender equality social bonds amid a burgeoning demand for ethical investments. Such funding has doubled in Australia over the last couple of years to AUS$51.5bn according to the Responsible Investment Association Australasia.
The NAB five-year bond was re-invested in companies cited as employers of choice by the Workplace Gender Equality Agency, and offered a 3.5% return for investors.
For those worried about regulation, the growing demand for social bonds has prompted the International Capital Market Association in London to issue guidelines. Hot on the trail, the International Finance Corporation, the World Bank’s private investment arm, raised US$500m through its social bond programme to finance female-led businesses.
Investors involved in the US$22.9tr allocated to socially responsible investing will inevitably ask whether these bonds foster gender equality in the workplace, and whether they generate good returns. Firstly, companies raising monies with such bonds must use the proceeds in accordance with the principles laid down by the ICMA. There are, however, no hard and fast legal rules involving breach of covenant. Critics of the current situation suggest that to guarantee change on gender issues, other incentives such as taxation credits or measures to lower funding costs may need to be considered.
Returns are also an issue. Although it is difficult to generalise, the NAB bonds yield 3.5% on a par with its other debt.
There are two streams of encouragement for this kind of investment. The first is how attractive they are in the current market. The Australian QBE Insurance Group saw its US$400m bond massively oversubscribed with demand of over US$9bn, for the issue designed to finance or re-finance debt from companies that met its equality standards. The oversubscription was double that which the insurer normally sees. The bond has performed well in terms of bidding. This was possibly due to strong technicals in a low rate environment amid increasing investor demand for Environment, Social and Governance Bonds.
The QBE bond may not be a good indicator since it was meticulously planned and targets the companies that have committed to the United Nations 7 principles on Women’s Empowerment and entities referred to in the Equileap 2017 Gender Equality Report. This approach made the QBE Bond attractive to investors and helped in marketing the issue. Unsurprisingly QBE have left the door open to issuing more bonds.
The take-up of the QBE bond was worldwide across Asia with 51% participation, Europe and the Middle East accounting for 37% and the US taking up the remainder. Fund managers dominated the deal with a 86% take-up while private banks accounted for nine percent, insurance companies three per cent and others two percent.
Cynics may argue such demand reflects the strength of the issuer rather than the ethos behind the investment and that fixed-income markets will not impact on the workplace, even in Australia which has good gender equality metrics. However, while these instruments may not solve salary gaps overnight, they do highlight good practice which will always attract investment.
The second source of encouragement is the success of green bonds as they become mainstream. Issuance last year peaked at US$120bn and green-bond specific exchanges, indexes, credit ratings and exchange-traded funds have emerged recently. High demand is reflected in the S&P Green Bond index with returns hugely outperforming the S&P 500 bond measure. Investors obviously like the idea of doing well by doing good.
So can the markets drive social change? Bonds promoting gender equality in the workplace provide great PR for the company and attract investment, and as we have observed there is a correlation between virtuous behaviour and sound returns.
The problem is lack of supply, something which slows any market. Whether the examples set by the Australian issues are sufficient to drive these bonds remains to be seen.
Simon Lynch is the owner of Treasury Talent.
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