The Sustainable Development Goals (SDGs) have been gaining increasing attention in the bond market. Mexico this week became the latest actor to enter the fray after launching what it described at the world’s first sovereign bond linked to the United Nations goals.
The country raised $890m after investors queued for up to $5.7bn, equivalent to 6.4 times the allocated amount, the UN Development Programme, which partnered on the initiative said in a statement.
The proceeds from the seven-year bond will be used to finance SDG-oriented programmes across Mexico, for example, in cities struggling with illiteracy and school attendance rates, health services deprivation, or absence of electricity access.
Why is this important? Over the past two years, green bonds and their offshoots - blue, social, sustainable - have seen a flurry of issuances, as well as a growing number of issuers embracing the SDGs in their strategies.
Social bonds, which finance projects with primarily social objectives, in particular, are emerging as one of the fastest-growing segments of the sustainable debt market this year, according to rS&P Global Ratings, fuelled by Covid-19 and investors responding to demand to tackle rising inequalities created by the crisis. The ratings company said:
“This call for a greater focus on mitigating social risks has spilled over into the capital markets, particularly through the rapid rise of social bond issuance, which has more than quadrupled so far this year, even as credit conditions have weakened sharply.”
Bertrand Rocher, portfolio manager and senior credit analyst at Mirova, investment manager dedicated to sustainable investing, said green bonds have paved the way for the success of social and sustainability bonds. He told Geneva Solutions:
"Globally what we have observed over the first half of 2020 because of the crisis was that to some extent the growth in green bond issuance has slowed down while that of social and sustainability bonds have accelerated.”
Mirova is an affiliate of Natixis Investment Managers. Natixis CIB, the corporate and investment bank of Natixis, developed the framework for Mexico’s sovereign SDG bond. Commenting on the deal, Rocher said:
“It is not that easy for a sovereign to measure how they reach environmental or social goals given the large spectrum of missions they encompass. So we welcome sustainability bonds of this size because it offers a way for investors to avoid the lack of transparency usually tied to the purpose of the debt states raise.”
Blue, green, and SDG bonds - what’s the difference? Green bonds finance projects and activities with environmental benefits, while proceeds from blue bonds are invested in marine and ocean-based projects with a positive impact. SDG bonds follow the same concept, with issuers committing to using the funds raised in the bond offering to achieve certain SDG objectives, such as promoting gender equality, access to better healthcare or clean water supply. - Betrand Gacon, Impaakt CEO and programme co-director of the Executive Certificate on SDG Investing at The Graduate Institute Geneva, told Geneva Solutions:
“Those are all different names for the same mechanisms. And those mechanisms are very powerful because they allow investors to have the same risk and return profiles but make sure the money is being used for, say, environmental issues.”
A new breed of bonds: Pressure on companies to improve their track record has spurred new ideas on how to integrate sustainability targets into the bond market. Last year saw the emergence of new SDG-linked bonds where payments to creditors are linked to sustainable development targets. In other words, progress - or lack thereof - towards the SDGs results in a decrease or increase in the instrument’s coupon.
The first-ever bond of this kind was launched by Italian energy firm Enel at the end of last year, tying interest payments to key performance indicators including increasing its commitment to renewable energy. Brazilian pulp and paper maker Suzano was next, raising $750bn in bonds tied to lowering its emissions target earlier this month. A week later, Pharmaceuticals giant Novartis became the third company to bet on this new model, raising €1.85bn from the sale of a bond on which interest payments will rise if the drugmaker fails to expand access to medicines and programmes to combat malaria.
More bond issuances of this kind are expected to follow. But a few challenges still need to be ironed-out, and some improvements to be achieved before the SDG-linked bond market really enters into a more buoyant phase, said Rocher. Among the issues to resolve: finding a different way to incentivise investors other than being rewarded by a step-up coupon activated when the issuer does not meet its SDG goals. And adding another layer of impartiality when it comes to companies setting their own objectives.