Issuing new green, social and sustainability bonds in emerging markets could be crucial to meeting the UN’s Sustainable Development Goals (SDGs).
This is the claim of a new report by the Global Steering Group for Impact Investment (GSG).
The paper highlights landmark bonds already operational in emerging markets. These include a $40 million bond issued by a private company in Kenya for environmentally-sustainable student accommodation. Argentina’s first gender bond issued by the charity Promujer is also included (enabling loans for 1429 women-owned small and medium enterprises).
GSG also references the Government of Chile’s successful adoption of GSSS (green, social, sustainable and sustainability-linked) bonds. Since 2019, the Chilean government has raised more than $38 billion through these bonds to finance sustainable development.
The SDG gap in emerging markets
Such bonds (sustainability-linked bonds are a special and more recent, but fast growing category) have become a popular financial instrument in the past 15 years. According to the World Bank, the GSS (global, social and sustainable) bonds market reached $3.8 trillion by the end of 2022. But only 16% of this was in emerging markets. GSG states that the size of the annual SDG financing gap is currently $4 trillion (an OECD figure). The biggest gap is in the least developed countries.
The steering group’s report, titled Financing SDGs in emerging markets – the role of GSSS Bonds, calls on governments, Development Finance Institutions (specialised development banks) and impact investors, to build more of the bond offerings in the countries needing most support to meet the goals.
According to the UN Sustainable Development Solutions Network (SDSN), global progress on the SDGs has been “static” for the third year in a row. There appears to be little sign of any of the goals being met. Additionally, the sustainable development gap between the most and least developed countries is widening, states the GSG report.
“It’s becoming clearer by the day that we need financial instruments that unlock institutional investor capital to finance the SDGs in emerging markets,” said Alasdair Maclay, chief strategy officer at GSG. “The GSSS bonds are great for that purpose. The role of emerging market governments in this is also becoming clearer and more should follow the great existing examples such as the one in Argentina. This saw the government change existing rules to allow organisations like Promujer to raise gender bonds.”
The steering group’s report for its members outlines what it believes is needed to progress the creation of bonds in emerging market economies.
Mandatory impact investment
This includes encouraging issuers to use more robust standards to avoid claims of “greenwashing”. It also calls for private investors to include GSSS bonds in their investment strategies, and asks policymakers to reduce transaction costs and make it mandatory to invest in sustainable debt.
In France, for example, solidarity-based retail funds are required to invest between 5-10% of their funds into accredited social enterprises.
Banks can do more to support green bonds
MacLay believes there is a strong role for DFIs to do more in the space. “Within the whole newish conversation about how development finance institutions can mobilise more private capital than the low amounts they currently mobilise – GSSS bonds are a great solution – such as the issuances from the African Development Bank and the Islamic Development Bank,” he added.
Claudia Cahalane is the Investments Editor at Alliance