The Asian Development Bank (ADB) is promoting the use of the SDG accelerator bond to attract private financing to support a green, resilient, and inclusive recovery from the Covid-19 pandemic and meet the United Nations’ Sustainable Development Goals (SDGs).
In a new report, Accelerating Sustainable Development after Covid-19: The Role of SDG Bonds, the multilateral development bank says the SDG accelerator bond (SAB) 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 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,” says ADB vice-president Ahmed M. Saeed. “For countries looking to fund sustainable projects and programmes on a large scale, capital markets represent an underused but viable mechanism to bring in SDG investments.”
Southeast Asian countries issued a record US$12 billion of green, social, and sustainability bonds in 2020, but their financing needs have only grown amid the pandemic. The SAB 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 (SOEs) access funds. The framework would allow variations in fund structure among countries and issuers of the accelerator bond or other SDG bonds.
The ADB estimates that Southeast Asia will require US$210 billion per year between 2016 and 2030 to support investment in vital climate-compatible infrastructure. Even before the pandemic, infrastructure investment, particularly from private capital sources, was far below the levels needed, with the investment gap estimated at between 3.8% of gross domestic product (GDP) to 4.1% of GDP (when taking climate change into account) between 2016 and 2020 in some members of the Association of Southeast Asian Nations (Asean).
According to the bank, the aim of a SAB is to provide a return comparable to a similar instrument when held to maturity, but offering cheaper funds for projects in initial periods as an incentive to mainstream SDG projects and reach targets more quickly.
A SAB is intended as a transitional financing tool for projects that contribute strongly to SDGs but are not yet commercially bankable. This may be due to affordability, lack of a tested technical model, or a gradually improving utility structure, but which will gradually see a rise in returns over time if supported. A SAB will be particularly relevant to governments and SOEs that have revenue constraints due to Covid-19, but are recovering.
The bond seeks to blend traditional market financing with concessional funding from the public sector, whether as credit enhancement guarantees or actual fund flows, under the principle of a risk being taken by the entity best suited to address it. As such, initial construction and approval period risks are considered best managed by the public sector and later operations best managed by the private sector, the bank says.
Returns on a SAB are expected to be pre-structured as equivalent to similar market instruments, but over the long term with due incentives and short-term protection for investors to stay in the bond. Investors would be helping a government or SOE make the move into projects that support one or more of the SDGs.
Green finance facility
The report showcases successful sustainability bonds issued in the region, including those supported by the ADB-managed 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 Organization for Economic Co-operation and Development.
With US$1.7 billion in co-financing 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.
The bank says tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability are priorities in its Strategy 2030. ADB has committed to deliver US$80 billion in climate finance between 2019 and 2030, and ensure that at least 75% of its projects will address climate change mitigation and adaptation by 2030.