Critically-acclaimed
Korean film Parasite offers a rare
glimpse into the cramped living conditions facing residents of Seoul’s banjiha, or semi-basement homes. The
2020 Academy Award-winner for Best Picture shines a spotlight on a growing
trend of income inequality and the resulting housing crisis that Korea is
facing.
Like many other
developed countries, Korea is grappling with the challenges of providing
affordable, quality housing for low and middle-income families, especially in
its large cities.
Home ownership is
expensive in Korea for a number of reasons. Urbanisation, speculation, and
sometimes inadequate access to housing finance all add up to Korea suffering
from some of the world’s least-affordable real estate, even in a global
context. The country’s unique jeonse rental system, which requires large cash deposits, also makes it difficult for
low-income families to save enough to get a foot on the property ownership
ladder.
Old residential area in Seoul, South Korea
The Korean
government established the Korean Housing Finance Corporation (KHFC) in 2004 to
help address some of these issues. Its mandate is to improve national welfare
by facilitating the long term and stable supply of housing finance in Korea.
The lender is a regular issuer of covered bonds and mortgage-backed securities
to finance its efforts to help those low and middle-income families buy their
own homes.
Pioneering the market
In recent years,
KHFC has emerged as a pioneer of social bond issuance to fund their activities.
Social bonds are a subset of the fast-growing Green, Social and Sustainability
(GSS) category of bond issuance, and they are poised for growth as a financing
solution to Asia’s broad spectrum of social needs. That includes activities
like KHFC’s mortgage lending, which delivers positive social outcomes.
Having issued the
first Asian social covered bond in 2018 and the first Asian AAA social covered
bond in 2019, KHFC returned in February this year with a EUR1 billion deal. The
success of the deal demonstrated the power of this format to attract new
investors at the same time as directing capital to urgent social needs.
“KHFC has
opened up a new and crucial market for issuers that make a positive impact in
societies across Asia,” says Chaoni Huang, Head of Sustainable Capital Markets,
Asia Pacific, at BNP Paribas. “They have the power to make a real difference to
communities around the region, whether that means allowing an ordinary family
to buy their own home, building schools and hospitals where they are needed
most or ensuring that people have reliable access to clean water.” BNP Paribas has
acted as Joint Lead Manager for all of KHFC’s social covered bond transactions
to date.
Defining social
For a bond to be labelled “social”,
issuers need to establish a framework to show how the funding will achieve
positive social outcomes.
Independent agencies then validate these proposed
outcomes. Issuers are also expected to provide continued transparency about how
the proceeds are being deployed, as well as measuring their impact, through
post-issuance reporting.
The International Capital Markets
Association (ICMA) has published Social Bond Principles that provide guidelines
for issuing these securities.
Interest rates for social bonds are
typically similar to those for conventional bonds. However, with more than US$30 trillion of global investments
– and rising – being managed in accordance with Environmental, Social and
Governance (ESG) principles, Ms Huang argues that
social bonds can offer issuers longer term strategic advantages. “Issuers can attract new and high quality investors, especially from Europe, by
using social and green labels for issuance,” she says, pointing out that KHFC
has successfully targeted the European investor base by issuing in euros.
Demand for GSS bonds continues to
outstrip supply, according to Ms Huang. According to the Climate Bonds
Initiative, global GSS issuance reached US$342.8
billion in 2019, up a stunning 69
percent over 2018. Social bonds are still a small component of GSS as a whole,
with USD20 billion of new sales in 2019, but they also achieved strong growth
of 41 percent year-on-year.
More Asian issuers are joining KHFC on
the social bond bandwagon. In January this year, India’s Shriram Transport Company raised
US$500 million with the country’s first international public social bond. The
proceeds will be used for employment generation, including through financing
for micro, small and medium enterprises.
A more social future?
Experts
predict that green financing volumes, as a proxy for the broader GSS market,
will continue to surge in 2020: the Climate Bonds Initiative forecasts US$350-400 billion of
green bond and loan issuance in 2020, up from US$255 billion in 2019.
” The biggest challenge with issuers is simply building awareness about social bonds as a relatively new issuance format. ”
Robust investor demand for ESG assets should support this growth. In the BNP Paribas ESG Global Survey 2019, the majority of asset owners and managers who
responded said they expected ESG fund allocations to increase further in the
next two years.
However,
the survey also identified a challenge for social bonds: nearly half of the
respondents said they found “social” the most difficult element of ESG to
incorporate into investment analysis. While the investment industry works
towards a consensus on what constitutes the social component of ESG, Ms Huang
at BNP Paribas says the biggest challenge with issuers is simply building
awareness about social bonds as a relatively new issuance format.
“We
want to increase understanding of social bonds,” says Ms Huang. “The more
familiar and comfortable investors are with them, the greater their potential
to help address social needs in Asia, across education, healthcare, housing and
much more.”
