Sustainable
Development Bonds
A 2014 report from the United Nations estimated that there is a yearly gap of $2.5 trillion
in funding for the achievement of the Sustainable Development Goals (SDGs). At a high
rate of participation, $1.8 trillion per year could be invested by the private sector to bridge
the gap1. However, this high rate of participation will be difficult to achieve without adapted tools that facilitate private sector investment in the SDGs. Over the last few years,
the development and impact finance sectors have developed numerous innovative investment instruments to attract both private and public investors. In addition to popular
layered funds, a fund structure in which risks and rewards are differentiated by investortype, various types of bonds instruments such as green bonds, social impact bonds, and
project bonds have emerged. This short report aims to clarify and present the different
bonds currently available on the market that can help solve the SDGs investment gap.
1. Categories of Sustainable Development Bonds
The financing instruments created to respond to the investment needs of the SDGs can
be grouped under the general term of Sustainable Development Bonds (SDBs). SDBs
are debt securities issued by private or public entities to finance activities or projects
linked to sustainable development. The issuers of SDBs issue bonds contractually state
the interest rate (coupon) that will be paid and the time at which the bond principal must
be returned (maturity date)2.
1 UNCTAD. (2014). World Investment Report 2014.
2 Investopedia. (2016). Bond.
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SDBs can be classified according to several criteria but can be primarily distinguished
by the nature of their returns. For some instruments, the return is fixed and does not
depend on the performance of the activity while for others the return is directly linked to
the success of the program. The latter instruments do not guarantee any return and are
therefore more risky. Although these results-based instruments are very interesting, they
only represent a marginal section of the SDB market.
Bonds can also be differentiated by their focus sector. With the current instruments available, investors can focus their support on both social and environmental projects around
the world. The most common instruments are Green Bonds, Microfinance Bonds and
Charity Bonds, Social Impact Bonds, Development Impact Bonds, and Environmental
Impact Bonds. A variety of sub-categories of these bonds exist, in which the focus of the
bonds are significantly narrowed. These categories have been outlined in the glossary at
the end of this report. However, as more instruments emerge in the coming years, more
categories are likely to be defined.
Structured like traditional bonds, Green Bonds are fixed-income financial instruments
for raising capital to fund green projects, assets, or business activities with an environmental benefit. Several types of green bonds exist (including Green “Use of Proceeds”
Bonds, Green “Use of Proceeds” Revenue Bonds, Green Project Bonds, and Green
Securitized Bonds) and additional types may emerge as the market is still developing.
Also under the Green Bond umbrella are Water Bonds, known as Blue Bonds, which
raise capital for the sustainable ocean economy. Even though they are not mandatory, a
set of criteria and principles for Green Bonds have been identified as best practices by
the Climate Bond Initiative to improve confidence and transparency. The Green Bonds
represent the largest share of the SDBs market with a value of $41,8 billion and typically
have low-medium returns (around 2-3%) and impact. Both development and commercial
organizations, like Unilever, as highlighted in the case studies, offer Green Bonds.
Development Finance Institution (DFI) Bonds are bonds issued by DFIs to raise capital to support their initiatives that provide financial services in the public and private sector of developing countries and for investments that promote sustainable development.
The World Bank is one of the DFIs that has issued bonds to support its activities. Following the same approach, Microfinance Bonds and Charity Bonds are bonds issued
by microfinance institutions, social businesses, or charities to finance their business operations. Again, these look like traditional bonds, the difference being that the organization is involved in activities related to microfinance and (mostly) social or environmental
improvements. Microfinance bonds tend to have higher returns (3-6%) compared to DFI
Bonds. Symbiotics, a leading investment company specialized in emerging, sustainable
and inclusive finance, issues such bonds via a platform to support microfinance institutions. DFI Bonds are the second largest category of SDBs in term of market size, representing more than $23.5 Billion while Microfinance Bonds represent over $500 million.
Sustainable Development Bonds
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Finally, Social Impact Bonds (SIB), Development Impact Bonds (DIB), and Environmental Impact Bonds (EIB) share the same mechanism. Private investors invest
in a social (SIB and DIB) or environmental (EIB) service provider who, if successful,
delivers both social value and public sector cost savings. In the case of a SIB, the local
government repays the investors (principal + interests) according to the success of the
project. For a DIB, a development agency or a charity foundation repays the investors
as the government of a developing country often cannot afford it. The highest number of
SIBs can be found in their country of origin, the U.K but additional SIBs are increasingly
designed and implemented in Europe (The Netherlands, Belgium, Germany, Austria, and
Portugal), the United States and Australia.
Many other instruments are derivatives of the SIB, like Humanitarian Impact Bonds
(providing humanitarian help) or Social Success Notes (where the donor repays the
interests only). Those instruments are not bonds per se as the return is variable and
depends on the performance of the project.
They represent a very small section of the SDB market, with SIBs and DIBs counting for
slightly more than $200M in 2015. Despite that small coverage, the SIB market is growing quickly (14 SIBs and $66 million invested in 2014 compared to 1 SIB and $8 million
invested in 2010) and the awareness of the potential of the tool has increased. Because
of higher risks, the returns on these bonds are usually high (10% in average) but few
SIBs have failed to keep their promises to date.
This chart represents the main SDBs but is not intended to represent the full market.
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2. Case studies
Green Bond: Unilever issues first ever green sustainability bond3
In 2014, Unilever announced the issuance of the first ever green sustainability bond.
The £250,000,000 2% Fixed Rate Notes due 19 December 2018 (the “Notes”) are issued by Unilever PLC and guaranteed by Unilever N.V. and Unilever United States, Inc.
Unilever has worked with DNV GL, an independent leading environmental consultancy,
to develop a Green Sustainability Bond framework, based on the Green Bond Principles.
The current pipeline of projects in which the proceeds of the bond will be invested includes: a liquid laundry detergent factory in Johannesburg, South Africa; a laundry powder facility in Sichuan, China; a Home and Personal Care factory in Selcuklu-Konya,
Turkey; an ice cream factory in Johannesburg, South Africa; the expansion of a spreads
factory in Kansas, US; and the ‘Lean & Green Freezer’ cabinets project in Turkey, Russia
and the US.
DFIs Bond: The World Bank Bonds for Sustainable Development4
The World Bank (IBRD) offers investors a broad range of products in 56 various currencies, with a spectrum of maturities up to 50 years and ranging from benchmark bonds
to tailor-made notes designed to suit specific investor needs. The World Bank is rated
AAA/Aaa based on its capital, reserves and prudent financial policies. It has projects in
various sectors: Agriculture, Education, Energy, Finance, Trade, Industry, Governance,
Health and Social Services, Transportation, Water, and Sanitation.
3 Unilever. (2014). Unilever issues first ever green sustainability bond.
4 The World Bank Treasury. (n.d.). Bonds for Sustainable Development.
Sustainable Development Bonds
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The World Bank partners with investors and financial intermediaries to connect the investors to their purpose (the expected social and environmental impact). In 2015, the
funding volume reached $58 Billion.
Microfinance Bond: Symbiotics Issues $10m in Bonds to Benefit China’s
CFPA Microfinance Management5
Symbiotics, a Switzerland-based investment company that focuses on emerging markets, recently completed a bond transaction. Bonds worth USD 10 million were sold to
unidentified investors to benefit CFPA Microfinance Management, a microfinance institution (MFI) in China that is affiliated with the China Foundation for Poverty Alleviation.
Social Impact bond: UK Career Connect6
In 2012, Career Connect, a charity providing career-focused guidance, advice, and support, was
commissioned by the Department of Work & Pensions (DWP) to deliver a three-year ‘New Horizons’
project helping disadvantaged 14-19 years-old.
The aim was to help them improve their attendance and behavior at school, achieve educational
qualifications, and move on to further education
or employment. Bridges Ventures and Big Society
Capital were the lead investors and the Department for Work and Pensions (DWP) agreed to pay
for a pre-determined range of positive outcomes.
Triodos Bank was responsible for structuring and
performance-managing the SIB.
The Career Connect SIB delivered over £9m
worth of positive outcomes to the Department of
5 Symbiotics. (2015). Impact Finance Bonds.
6 Bridges Ventures. (2015). Bridges-backed Career
Connect delivers key SIB milestone.
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Work & Pensions at a cost of just £4.5m and has been able to repay all of the risk capital to its social investors, plus interest. It was therefore re-commissioned in 2015 by the
DWP to deliver a second three-year program with young people with mental health and
emotional wellbeing issues.
Development Impact Bond: The Educate Girls DIB7
The Educate Girls DIB aims to increase school
enrolment and improve learning outcomes for
18,000 girls in Rajasthan (India). A high-performing education NGO operating in Rajasthan, Educate Girls, received upfront investment capital
(USD 267,000) from the UBS Optimus Foundation
to expand its services to these girls, with a promise of a return (max 15%) for the investor from
the outcome payer (The Children’s Investment
Fund Foundation) provided the program improves
school enrolment and test scores.
This payment metric is first measured using the
students’ performance on the ASER test, a widely
used test of basic numeracy and literacy, in a randomized controlled trial and then measured using
an enrolment rate, defined as the percentage of
girls who are enrolled on school rosters at the end
of three years. The targets will be assessed regularly by an independent evaluator, IDinsight, over
the course of the three-year program (2015-2018).
The Educate Girls DIB will also be supported by
project managers, Instiglio, who are providing performance management services to Educate Girls.
These few examples show the diversity of available instruments that aim to support
organizations linked to sustainable development. The different mechanisms of these
bonds can suit a wide range of the different needs and requirements of private-sector
investors in terms of risk, sector, and model.
7 Instiglio. (n.d.). The Educate Girls Development Impact Bond.
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3. List of known categories of SDBs
Charity Bond = Charity Bonds are issued by charities as a form of long term debt to expend their
business operations. (Know How Non Profit (2014).
Charitable Bonds.)
Development Finance Institutions (DIFs) Bonds
= Bonds issued by Development Finance Institutions to finance their business operations
Development Impact Bond = DIBs bring together
private investors, non-profit and private sector service delivery organizations, governments and donors to deliver results that society values. They provide upfront funding for development programs from
private investors, who are remunerated by donors
or host-country governments—and earn a return—if
evidence shows that programs achieve pre-agreed
outcomes. If interventions fail, investors lose some
or all of their investment. (Center for Global Development & Social Finance (2013). Investing in Social
Outcomes: Development Impact Bonds.)
Environmental Impact Bond = Also defined as a
pay-for-performance contract, EIBs’ goal is to address an environmental issue. As for the SIBs and
the DIBs, the EIBs require a government or other
contracting entity to repay the investors the principal
and interest if the program targets are met. The EIB
represents the monetarization of future costs savings. (Nicola, D. J. (2013). Environmental Impact
Bonds.)
Environmental Performance Bond = Instrument
where payments are made to the respective authority before a potentially environmentally damaging
activity is undertaken, mostly in the course of the
official licensing procedure. The payment is only returned if the environmental damage of the activity
does not exceed certain thresholds. (AFR Maison
(n.d). Performance Bonds.)
Environmental Policy Performance Bond =
Governments use debt to ‘promise’ investors they
will stay true to their environmental policies, at no
cost to themselves if they keep their promises.
They do not require promises that the issuer will
invest the money in green projects and the money can be used for any government expenditure.
The interest rates on these new bond types would
be linked to CO2 reduction targets. Furthermore,
the more a government reduces CO2 emissions,
the less interest the government pays.
Sustainable Development Bonds
Note: also called CO2 government bonds. (Bouzidi,
A. & Mainelli, M. (2015). Environmental policy performance bond.)
Forest Bond = Forest bonds allow an issuer to
borrow from the international markets to fund forest preservation and transitions to sustainable livelihoods. There are a number of organisations that
could do this, including private-sector financial institutions, supranational institutions and multilateral
development banks, and state-, regional- or national-level governments. (Cranford, M., Henderson, I.,
Mitchell, A., Kidney, S., & Kanak, D. (n.d.). Unlocking Forest Bonds: A High-Level Workshop on Innovative Finance for Tropical Forests).
Forest Resilience Bond = The Forest Resilience
Impact Bond is a proposed new form of pay-forsuccess funding that seeks to leverage financial innovation to fund environmental conservation. The
inaugural Forest Resilience Impact Bond intends
to raise capital from private investors to fund forest
restoration designed to decrease burn severity and
increase water availability for local utilities. (Madsbjerg, S., & Connaker, A. (2015). Fighting Wildfire
With Finance.)
Green Bond = Fixed-income financial instrument
for raising capital to fund green projects, assets
or business activities with an environmental benefit. (Bartels, W., Holland, P., & Metzgen, T. (2015).
Sustainable Insight. Gearing up for green bonds.)
Note: The term ‘labelled’ green bonds refers to
bonds marketed by the issuer as ‘green’, where the
proceeds are for climate/green assets or projects.
‘Climate-themed bonds’ are represented by a broader universe of bonds whose proceeds are for climate
projects but that are not (yet) labelled as green. This
universe is much wider than the ‘labelled green
bonds market’. (Climate Bonds Initiative (2016).
Frequently Asked Questions; Standard.)
Humanitarian Impact Bonds = The HIB is a derivative of SIBs and aims to raise the necessary funds to
provide physical rehabilitation services to thousands
of disabled people in countries that suffer from conflicts and violence. (Focus on Belgium. (2016). Belgium, co-founder of the Humanitarian Impact Bond.)
Microfinance Bonds = Bonds issued by microfinance institutions targeting micro and small enterprises in emerging countries.
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Pay-for-Success Bond = Pay for success bonds
and social impact bonds are often used interchangeably. When the Social Impact Bond was first
introduced in the United States, it was called Pay for
Success and the terms were used synonymously.
However, there is growing consensus that «Pay
for Success» encompasses a broader umbrella of
outcomes-based funding arrangements, while Social Impact Bonds are one of many potential ways
to finance Pay for Success contracts. (Nonprofit Finance Fund. (2015). Frequently Asked Questions:
Pay for Success/Social Impact Bonds.)
Redd+ (Reduce Emissions from Deforestation
and forest Degradation) = Effort to create a financial value for the carbon stored in forests, offering
incentives to developing countries to reduce emissions from forested lands and invest in low-carbon
paths to sustainable development. (UN-REDD
(2016). About REDD+.)
Social Impact Bond = Financial vehicle that
brings in non-government investment to pay for
services which, if successful, delivers both social value and public sector cost savings. Inves-
tors receive a financial return from a proportion of
the cost savings delivered. (Bolton, E., & Savell,
L. (2010). Toward a new social economy. Blended value creation through Social Impact Bonds.)
Note: called Social Bond in New Zealand, Social
Benefit Bond in Australia, and Pay-for-Success
Bonds in the USA
Social Success Note = Innovative results-based
financing for social business, inspired by the Social
Impact Bonds developed initially in the UK. It aims to
leverage scarce non-commercial capital to mobilize
commercial capital for social outcomes. (Yunus Social Business (2015). Social Success Note.)
The Nature Conservation Notes = The Nature
Conservancy’s Conservation Note is a fixed income
product that channels capital to sustainable agriculture and nature protection initiatives that alleviate
poverty and conserve threatened species in African
and Latin American countries. (Althelia Ecosphere
(n.d.). Conservation Notes.
Water
Bond
=
Bonds
to
fund
jects in the sustainable ocean economy.
pro-
Note: Also called Blue Bonds
4. Key Readings
Bartels, W., Holland, P., & Metzgen, T. (2015). Sustainable Insight. Gearing up for green bonds. Retrieved from KPMG: https://www.kpmg.com/Global/
en/IssuesAndInsights/ArticlesPublications/sustainable-insight/Documents/gearing-up-for-green-bondsv2.pdf
Center for Global Development & Social Finance.
(2013). Investing in Social Outcomes: Development
Impact Bonds. Retrieved from Center for Global Development: http://www.cgdev.org/sites/default/files/
investing-in-social-outcomes-development-impactbonds.pdf
Nicola, D. J. (2013). Environmental Impact Bonds .
Retrieved from The International Land Conservation
Network: http://www.landconservationnetwork.org/
sites/default/files/Nicola,%20Environmental%20Impact%20Bonds.pdf
Sustainable Development Bonds
Social Finance. (2009). Social Impact Bonds. Rethinking finance for social outcomes. Retrieved from
Social Finance: http://www.socialfinance.org.uk/wpcontent/uploads/2014/07/SIB_report_web.pdf
UBS. (2015). In Challenge lies Opportunity. Investing for sustainable development. Retrieved
from http://www.heatherholden.ca/wp-content/uploads/2015/10/In-Challenge-Lies-Opportunity_Investing-for-Sustainable-Development.pdf
UN Global Compact, UNCTAD, UNEPFI, PRI.
(2015). Private Sector Investment and Sustainable
Development. Retrieved from Sustainable Finance:
http://www.sustainablefinance.ch/upload/cms/
user/2015_01_UNGC_Private_Sector_Investment_
and_Sustainable_Development.pdf
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This note is based on work coordinated by the European Impact Investing Luxembourg initiative, in particular:
Adriana Balducci, Innpact: [email protected]
Aurore de Halleux, Innpact: [email protected]
About European Impact Investing Luxembourg
The European Impact Investing Luxembourg initiative (EIIL) was launched in 2010, regrouping a number of major actors
of the Luxembourg financial place such as ADA, an NGO promoting autonomous development through inclusive finance,
the law firm Arendt & Medernach, Banque de Luxembourg, Deloitte, the law firm Elvinger Hoss & Prussen, Ernst & Young,
European Fund Administration, the European Investment Fund, Innpact-a firm specialized in innovative responsible finance solutions, KPMG, the Luxembourg Microfinance and Development Fund and PWC.
Its aim is to contribute to the development of the impact investing sector, to facilitate initiatives within this area in Luxembourg and to promote Luxembourg’s capacity to support a coordinated approach to impact finance.