Impact Blog
After COVID-19: The future of pandemic bonds

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      By Henry MasonESG Research Associate, Calvert Research and Management

      Washington - Investors are commonly advised not to try to time the market. While specific peaks and valleys can be difficult to predict with precision, we do know that bull and bear markets will happen. Investors that take the long view have the potential to achieve sustained gains overall.

      It is similarly difficult to predict specific outbreaks of disease. No one could have been reasonably expected to predict the impact COVID-19 would have on global economies in 2020 if asked on a cool fall day in late 2019. But while the timing of a specific disease outbreak cannot be anticipated, we do know that outbreaks can and do occur. This was the basis for the World Bank's inaugural issuance of pandemic bonds in 2017, which aimed to leverage private-sector capital to provide "pandemic risk insurance" to developing health systems.

      Investors were incentivized to purchase these pandemic bonds due to the potential diversification benefits they provided, as well as the high coupon. While the maximum payout of the 2017 issuance was $195.8 million (a small sum relative to the billions being mobilized globally for developing countries to combat this pandemic1), the lessons learned from how these bonds have performed in the current pandemic may help make them more effective in future pandemics.

      Pandemic bonds: Lessons learned from COVID-19

      These inaugural pandemic bonds have faced criticism from the global health community for their lack of impact. Although the coverage of potential pandemic-causing diseases was comprehensive, the complexity of the bonds' structure made them slow to respond to current needs. The backlash over the effectiveness of these bonds was likely a motivating factor in the World Bank's decision to cancel a second planned sale of pandemic bonds this July.

      Pandemic bonds that fail to expediently disburse funds to at-risk countries during the proliferation of a global pandemic are not meeting their public health objectives. Over the course of the bonds, investors have earned around $96 million in interest. Nonetheless, the long waiting period between the triggering outbreak and the disbursement of proceeds, and the complexity of triggering criteria, have done little to protect investors. Conversely, these provisions have had a materially deleterious effect on the potential health impact of the bonds. Investors rightfully want guarantees that their principal will not be lost due to false alarms, but as the 2017 bonds' 200% oversubscription suggests,2 low rate environments may make these high-yielding instruments attractive enough to allow for more responsive triggering mechanisms in the future (although investors' appetite for this type of risk may change following this pandemic).

      Bottom line: The inaugural structure of the World Bank's pandemic bonds did not adequately address the need to mobilize capital to poorer countries in an effective time frame. Critically, however, the importance of the problem that the World Bank identified and sought to mitigate has been reinforced. Although investors in these bonds have been stung, high-yielding pandemic debt in the future may still be attractive, especially if issuers act on lessons learned from these inaugural pandemic bonds.