SDG bonds to accelerate a green recovery after the pandemic
Anouj Mehta |
July 19, 2021, 8:31 p.m.
The pandemic has had a devastating impact on Southeast Asia’s achievement of the Sustainable Development Goals (SDGs), the international effort to improve the lives of people around the world, with various studies identifying in particular the millions of people pushed back into unemployment and poverty.
One way to help get the SDGs back on track is to increase the issuance by governments and government entities of SDG bonds in order to focus on one or more of the SDGs and also to raise funds from the government. private sector, essential to meet the increase in funding. gap for achieving national SDG targets.
The good news is that the global appetite for SDG obligations still exists. Thailand’s end-2020 sustainability bonds – one of the first sustainability bonds since the start of the pandemic – and backed by technical assistance from the Asian Development Bank (AfDB), have raised nearly $ 1 billion dollars and have been oversubscribed three times.
The less good news is that, despite reaching an all-time high, SDG bond issuance in many developing regions such as Southeast Asia is still only a fraction of the global total and what is necessary. This is the result of the perceived effort to develop such bonds by potential issuers as well as the perception of risk by the global investment community on many of these potential SDG bonds arising from issues such as the ability of issuers to the first time, weak sub-project pipelines, financial risks and legal complications. These perceptions constrain the scaling of these links.
One possible solution to this problem is the SDG Accelerator Bond, a new risk-free way to issue SDG bonds.
How do these links work? Imagine you are the mayor of Sea City, a medium-sized Southeast Asian city of 2 million people. Sea City is slowly recovering from the worst impacts of the Covid-19 pandemic, but your unemployment rate has skyrocketed during the crisis, tax revenues continue to decline, and your plans to improve the city’s infrastructure have been put on hold.
Before the pandemic strikes, your national government has set itself ambitious goals to fulfill its commitments to the Paris Agreement and the United Nations SDGs, to strengthen its profile as a green and sustainable country. As the mayor of a big city, you are committed to supporting your country in its global commitments to sustainable development, and you firmly believe in the importance of the SDGs to fight against poverty, inequalities, the degradation of the environment. environment, health and justice.
To boost employment, improve the city’s reputation, strengthen the city’s infrastructure and help mitigate climate change, Sea City City Council has decided to undertake three infrastructure projects that target a number of SDGs: (a) A light rail system to alleviate traffic congestion and provide safe, clean and comfortable transportation to hundreds of thousands of Sea City citizens; b) A sustainable solid waste management facility with advanced composting and sorting capabilities; (c) Five parks and recreation areas at various locations in the city that will contribute to the livability of Sea City and improve the health and well-being of citizens.
Despite having reached an all-time high, SDG bond issuance in many developing regions such as South East Asia is still only a fraction of the global total and of need.
How much will it cost? The total bill for these projects is $ 850 million. Sea City does not have $ 850 million, so you have decided to fund these projects through a combination of mechanisms: Sea City itself will provide $ 250 million and you will take out a sovereign loan of $ 500 million. with a development bank like the AfDB. The remaining $ 100 million will be raised through an SDG Accelerator Bond.
Sea City seeks to raise $ 100 million from two main groups of investors: one is made up of domestic impact investors comprising foundations and philanthropists, the other of foreign investors who fulfill a predetermined set of eligibility criteria.
But why would they choose to invest in the infrastructure of a mid-sized Southeast Asian city like yours with an unproven track record and limited funds? What is the attraction for foreign investors?
The SDG Accelerator Bonds would help mitigate these risks for investors with a structure that includes backing in the form of exit guarantee or investment loss protection by a national guarantee fund, itself backed by one or more credit agencies. multilateral or bilateral development. However, such support would not be unlimited but to deal with the perceived risks of an obligation for a limited period of time, perhaps time to kick-start the underlying sub-projects, and therefore gradually reduce the liability. of the guarantee fund.
The bond structure would also similarly provide financial incentives to the bond issuer during the guarantee period, such as deferral of upfront payments.
Therefore, in the case of Sea City, the possible guarantee fund could be called upon if Sea City was not able to reimburse investors at one of the fixed exit intervals, for example, when an investor can wish to withdraw.
Having such a structured guarantee makes the SDG Accelerator Bond seem much less risky for investors. At the same time, Sea City benefits from a structured obligation to make payments after the first years of construction, when usage increases and rising payments are aligned with tax revenue and project income from the sale. tram tickets, advertising on trains and platforms, supplier rents in parks, among others.
At the end of your projects, Sea City will monitor and measure their impact according to your country’s national sustainable financing framework, globally accepted impact measures and any other impact monitoring tool. After the success of the SDG Accelerator Bond, your city council now decides to issue such bonds on a regular basis to reach around $ 500 million by 2023.
At this point, the SDG Accelerator Bond concept is just that, a concept, even though it is based on global best practices in project finance. It should be refined and piloted before entering the traditional toolbox of green infrastructure financing.
We will need many innovative solutions and new ways of thinking to close the funding gap for the achievement of the SDGs after the pandemic. The ODD Accelerator Bonds could be a good start for this toolkit.
The piece is taken from the Asian Development Blog (www.blogs.adb.org)