How Can SDG Bonds Attract Green Infrastructure Financing?
Southeast Asian countries issued a record $12 billion in green, social, and sustainability bonds in 2020, but their financing needs have only grown during the current pandemic. The Asian Development Bank (ADB) is proposing that countries tap into global capital markets using a new kind of bond to support a green, resilient, and inclusive recovery.
Even before the pandemic, ADB estimated that the region needs $210 billion a year to build climate-resilient infrastructure between 2016 and 2030 to achieve the Sustainable Development Goals (SDGs). In 2015, the United Nations launched the 17 SDGs to end poverty, protect the planet, and ensure prosperity. However, actual infrastructure investment in Southeast Asia, and in developing Asia as a whole, was below the levels required.
The impact of COVID-19 on economies in the region as in the rest of the world has been devastating. The Southeast Asian economy contracted 4.0% in 2020 but is expected to bounce back this year.
“The COVID-19 pandemic has slowed down the momentum for sustainable and equitable growth in most of developing Asia and many countries are at risk of not meeting their SDG targets in climate resilience, gender equality, and human development,” said ADB Vice-President Ahmed M. Saeed. “For countries looking to fund sustainable projects and programs on a large scale, capital markets represent an underused but viable mechanism to bring in SDG investments.”
Accelerating sustainable development after COVID-19
A new ADB report says the SDG Accelerator Bond could help countries reduce the perceived investment risk posed by an issuing entity, sector, or project with no track record on bond issuance. The new bond proposes to combine exit guarantees and other credit enhancement structures with incentives to help countries meet SDG targets.
The SDG Accelerator Bond builds on global best practices in project finance and aims to standardize the risk–return structure to ensure investor appetite and help local governments and new state-owned entities access funds. The framework would allow variations in fund structure among countries and issuers of the accelerator bond or other SDG bonds.
“Besides funding to accelerate SDGs, the bonds could also help monitor progress achieved on sustainability overall,” said Ramesh Subramaniam, director general of the Southeast Asia Department at ADB in the report’s foreword. “SDG bonds could act as both an ‘enabler’ and an ‘enforcer’ to help countries make real progress toward their SDG goals and provide an opportunity for a wide range of investors to play their part in meeting the emerging global sustainability norms.”
Successful sustainability bonds
The report showcases successful sustainability bonds issued in the region, including those supported by the ADB-managed Association of Southeast Asian Nations (ASEAN) Catalytic Green Finance Facility (ACGF).
Established in 2019, the ACGF is an ASEAN Infrastructure Fund initiative. It is owned by all 10 ASEAN countries and ADB and supported by 13 partners, including the Sustainable Development Investment Partnership, a joint initiative of the World Economic Forum and the Organisation for Economic Co-operation and Development (OECD).
With $1.7 billion in cofinancing pledged so far, the ACGF is funding the financial design of more than 25 projects. It is helping some countries develop green recovery strategies, including policies, de-risking vehicles, and projects. The ACGF is also assisting in the issuance of green and sustainable bonds.