Green, social, sustainability and sustainability-linked (GSSS) bonds are proposed as a solution to help fund progress towards the SDGs and a just transition to net-zero. The GSSS bond market is valued at $3.8tn with potential improvements that include making opportunities in developing markets viable for commercial investors, reducing bond issuance costs, and aligning standards. The report offers recommendations on how issuers, investors, policymakers and development finance institutions (DFIs) can support the growth of emerging GSSS bond markets.

The report identifies two primary types of GSSS bonds: Use-of-proceed bonds that fund thematic projects with dedicated environmental and social benefits and sustainability-linked bonds (SLBs), which tie funding outcomes to results. Both types have experienced significant growth in the past year.

The report proposes recommendations to issuers, including adopting good reporting practices, involving third parties, picking instruments carefully, and aligning frameworks with existing standards. Policymakers can support this trend by issuing sovereign bonds to demonstrate feasibility, developing and harmonising standards and taxonomies and reducing transaction costs through tax exemptions and subsidies.

Climate change, combined with the COVID-19 pandemic, has shifted attention towards social and environmental factors. The report identifies that more than $30tn of new investment is required to achieve the SDGs by 2030. Developing countries have the greatest opportunity for growth in the GSSS bonds markets, provided that local issuers, particularly governments, provide the required leadership using green and social bonds. The report proposes that governments adopt an ecosystem approach to attract investments necessary to contribute to closing the funding gaps. DFIs can support private sector issuers with anchor investment and investors need to assess bond frameworks against recognised standards, integrate GSSS bonds into the investment strategies and actively engage with issuers.

Recommendations

Issuers are encouraged to adopt practices such as developing bankable project pipelines and involve third parties to improve issuer capacity. Policymakers are recommended to stimulate demand and issuance through mandatory requirements, to reduce transaction costs through tax exemptions and subsidies, and to develop and harmonise standards and taxonomies. Development finance institutions (DFIs) can act as market builders by providing anchor funding, de-risking GSSS bond investments, and building stakeholder capacity. Private sector investors should integrate GSSS bonds into investment strategies, design products tailored to developing markets, assess bond frameworks against recognised standards, and actively engage with issuers in developing markets.

ESG issues discussed

The report proposes an ecosystem approach to scale up GSSS bonds markets in developing countries, reflecting a shift from inputs to outcomes, a focus on results. SLBs are identified as part of a growing family of financial instruments that tie funding to results, reflecting a shift in focus from inputs to outcomes. The report identifies the lack of bankable projects as a key hurdle to growth of GSSS bond markets in developing countries, as well as difficulties managing penalties of failure to comply with allocation of the use-of proceeds. Recommended actions focus on improving issuer capacity, project pipelines, reporting practices commitments, and alignment with international standards.