SDG bonds and corporate finance: A roadmap to mainstream investments
This report describes how a market for mainstream investments that contribute to the Sustainable Development Goals (SDGs), could be created with enough liquidity, scale, and diversification, to attract a range of investors. It inspires and guides companies, governments, and cities, to benefit from better funding while implementing the Paris Goals.
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OVERVIEW
This report describes how a market for mainstream investments that help achieve the Sustainable Development Goals (SDGs), could be created to attract major players in the investment community. It advocates for the use of fixed-income products for SDG financing due to its longer term, lower risk asset class, and scale of US$6.7 trillion. A major focus of SDG financing is directing capital to emerging markets and where it is most needed. By extension, corporate finance can become a major player in closing the SDG funding gap through Foreign Direct Investments (FDI) via corporate bonds and equity.
This report was released as part of the 2018 UN Global Compact Leaders Summit and prepared by the UN Global Compact’s Financial Innovation for the SDGs Action Platform. This platform comprises organisations from across the entire investment value chain (from corporate and sovereign issuers to banks and institutional investors). Its purpose is to improve the risk-return profile of SDG investments to attract institutional investors. Overall, this report seeks to inspire investors and companies to tap into the private capital markets for cheaper and more reliable funding that helps implement the SDGs.
Key considerations
Currently, there is an inverse relationship between the size of asset classes and their SDG impact. Traditional investment vehicles which have the potential to attract the largest institutional investors (such as corporate bonds or equity), have only had a limited measurable impact on the SDGs. However, an exception is the market for corporate green, social and sustainability (GSS) bonds, which is experiencing a rising market supported by corporate, public, and bank investments.
Section one describes the broad portfolio of SDG investments that can be financed through SDG bonds. These include large corporations and banks developing market solutions for the SDGs, to national (and subnational) governments. This portfolio also includes smaller investments and large infrastructure projects that can be pooled together and securitised. The report introduces an alternate model for general-purpose corporate SDG bonds to accommodate a broader range of issuers.
An integrated model for SDG finance
Section two describes the main steps for companies to develop an integrated SDG investment model:
- Step 1. Create a credible SDG impact theory which substantiates how companies will contribute towards SDGs based on goals, targets, and key performance indicators (KPIs)
- Step 2. Monitor and measure the impact of SDG investments
- Step 3. Integrate SDG impacts into corporate strategy and governance
- Step 4. Structuring considerations for corporate SDG bonds and how to transpose best practices in the green, social, and sustainability bond market
The goal of this integrated model is to help companies contribute to the SDGs at the corporate level, particularly those companies that cannot always isolate their contribution through a specific investment or a stand-alone asset. This includes companies that are already entirely focused on SDG solutions, and those that are partially focused on contributing to the SDGs, through one or several of their main activities. It also addresses a growing interest among investors who wish to invest in SDGs through general-purpose bonds and equity.
KEY INSIGHTS
- In September 2015, all 193 member states of the United Nations (UN) adopted the 2030 Agenda for Sustainable Development. This involved a 15-year plan to end extreme poverty, fight inequality and injustice, and protect the planet. Central to the Agenda 2030 are the 17 Sustainable Development Goals (SDGs) and 169 underlying targets.
- According to the United Nations Commission on Trade and Development (UNCTAD), achieving the SDGs will require between $3 trillion to $5 trillion USD annual investment in developing countries alone. At the 2019 level of public and private investment, the Commission estimates an annual shortfall of about $2.5 trillion USD. While more public funds will be necessary to finance the SDGs, it is globally acknowledged that the capital markets can play a key part in closing this financing gap.
- The Business Commission for Sustainable Development found in its flagship report “Better Business, Better World” that the SDGs provide the private sector with new growth strategies that could open valuable market opportunities for investors. It identifies 60 inclusive and sustainable market 'hotspots' in four key economic sectors that are worth at least (in USD) $12 trillion: Energy ($4.3 trillion), Cities ($3.7 trillion), Food and Agriculture ($2.3 trillion), and Health and Well-Being ($1.8 trillion).
- There is growing investor interest in the SDGs with many of the world’s largest institutional investors viewing them as a key framework which could fill the growing demand for impact investments. Notably, California Public Employees' Retirement System (CalPERS) has called the SDGs a 'gift to investors' - the 17 SDG goals have become a reference point for the sustainability investment strategies of a number of large institutional investors.
- Green bonds were modelled after project-based investments (in clean energy) and infrastructure (by development banks). Such project-based investments require extra layers of oversight since they lack corporate governance systems (which have their own legal personality). These layers include investment committee approval of the use of funds, pre-approved use of funds, and independent verification of the use of funds.
- Currently, a large proportion of green bonds are issued by financial companies, reaching US$33.3 billion in 2017, or 21% of the green bond market. In addition, many social and sustainability bonds (including SDG designated bonds) were issued by financial institutions. For example, commercial banks ANZ, HSBC and Société Générale have raised capital from private investors to finance their commercial (and other) banking activities which support the SDGs.
- SDG Bonds can also be issued by regional, national, and multilateral development banks, which leverages the capital from donor countries to fund sustainable development projects. For example, every year, the World Bank leverages its triple-A credit rating to issue between US$50-$60 billion in the global capital markets, with proceeds supporting development programs aligned with the SDGs. These programs include access to healthcare, waste management, water, sanitation, and rehabilitation of ecosystems.
- Up to 2018, there had not been any asset-backed or project SDG bonds issued. However, many green bonds have been issued to finance assets and infrastructure. In 2017, mortgage-backed and asset-backed securities represented 16% of the green bond market with US$24.8 billion in issuance. The market scope could easily be expanded to a broader range of topics covered by the SDGs.
- Overall, the green bond market grew 78% in 2017, reaching US$155.5 billion. Corporations represented half of the overall market with US$77.9 billion issued. Non-financial companies made up the fastest-growing segment. Further growth is expected from the International Capital Market Association’s (ICMA) introduction of the Social Bond Principles (which expands the number of activities that can be financed through a thematic use-of-proceed bond), as well as a linkage document (which illustrates the relationship between SDGs and eligible categories for Green and Social Bonds). While still small, the social bond market is growing fast, from $2.2 billion to $8.8 billion USD from 2016-17.
- In 2017, the majority of corporate issuers of green bonds were concentrated in three sectors: Financials (43%), Utilities and Energy (35%), and Industrials (11%). And private sector issuers of social bonds represented only 15% of the market, with US$1.3 billion of issuance.
Things to learn
Actions to take
ESG issues
SASB Sustainability Sector
Finance relevance
RELEVANT LOCATIONS
RELATED TAGS
- corporate bonds
- corporate finance
- emerging market
- emerging markets
- ESG risks
- financial innovation
- financial model
- fixed income
- foreign direct investment
- green bonds
- impact framework
- impact investment
- institutional investors
- investment strategy
- SDG bonds
- SDG finance
- SDG investments
- SDGs
- sovereign bonds