banks.148 The Japanese Dai-Ichi life insurance company developed a large portfolio of SDG bond investments through multilateral development banks and acted as lead investor for a five-year bond issued by the IBRD, with half of the proceeds earmarked for UNICEF. There is significant untapped potential in the SDG-related bond markets, but the potential benefits have to be weighed against the risks. There are mixed views on whether or not an SDG-labelled bond issue enables Governments to secure more favourable terms. To the extent that bond investors are willing to provide a discount that secures reputational benefits and/or SDG impacts, there is a premium on the development of credible bond frameworks that provide comprehensive reporting, including budget tagging against specified programmes. This is an area in which the evaluation team believes UNDP is well placed to make a difference (section 6). At the same time, SDG bond finance does not automatically constitute new and additional resources for the SDGs. Fungibility problems loom large: Governments can use bond finance to fully or partially replace domestic resources. What matters is the net financing effect and the sustainability of borrowing.
BOX 3. The Benin SDG bond In July 2021, the Government of Benin issued Africa’s first SDG bond – a 24 year, 500 million euro issue with a coupon rate of 4.9 percent. The backdrop to the decision to enter the Eurobond market was the fiscal stress generated by COVID-19. Economic growth in 2020 fell from a projected 7 percent to 2 percent. Meanwhile, the Government allocated over 3 percent of GDP in 2020 to a COVID-19 response plan designed to reduce stress on the health system, provide a safety net for vulnerable households and support small enterprises. The spending pushed the fiscal deficit to over 5 percent. Even with emergency support from the IMF and other development partners, the Government’s fiscal position threatened to undermine spending on critical SDG areas, prompting recourse to the Eurobond market. The Eurobond revenue amounts to over 2 percent of GDP. The strategy is not without risks. Benin chose not to participate in the Debt Service Suspension Initiative in part because potential savings (0.1 percent of GDP) were limited, and the Government was concerned about the potential adverse impact on investor risk perceptions. However, external debt servicing is placing pressure on government finance. It will account for around one fifth of revenue to mid-decade. While the entry of Benin into the bond market was a bold move, the relatively favourable terms secured reflected some underlying advantages. The issue followed a successful entry in the bond market with a 30-year, 1 billion euro issue. Strong support from the IMF, reclassification as a middle-income country and the position of Benin as part of the West African Economic and Monetary Union, which provides access to currency reserves and sets a ceiling on fiscal deficits, may also have contributed. Source: IMF and background paper
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The Asian Development Bank (ADB) has a Green and Blue Bond financing framework, with a portfolio of over $700 million in green financing. As part of its response to COVID-19, the ADB-managed Association of South East Nations (ASEAN) Catalytic Green Finance Facility is now actively seeking to increase the weight attached to SDG financing in its sustainable finance portfolio. In 2020, the African Development Bank invested in a South African SDG-linked bond issue, the first of its type, to provide loans for small enterprises.
CHAPTER 4. FINANCING FOR AN SDG RECOVERY: BRIDGING THE GAP
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