This series is supported by our partner Aegon Asset Management. It explores how financial institutions are using the SDGs in their financial products across a range of asset classes. The series also includes briefings on the move from ESG to the SDGs and the SDG Impact Standards.
Several fixed income products explicitly aligned to the United Nation’s Sustainable Development Goals (SDGs), the world’s official developmental agenda, are now available including sovereign and corporate bonds and fixed income funds.
Mexico was the first to issue a sovereign SDG bond. In 2020, it raised $890 million for investment in projects with a focus on 11 of the 17 SDGs. The SDGs are embedded in the bond through ‘use of proceeds’ criteria for eligible projects. Since Mexico’s inaugural SDG sovereign bond, it has issued a further SDG bond in July 2021 and others, such as Uzbekistan and Indonesia, have followed suit. There is clear appetite for these products in the market with Mexico’s first bond being 6.4 times oversubscribed. The motivation of sovereigns in raising SDG funding is clear, namely to achieve their commitments to the 2030 Agenda for implementing the SDGs and to focus finance on appropriate activities.
The green, social, sustainable, sustainability-linked and transition bond market is expected to reach $1.9 to 2.2 trillion by the end of 2022. Although many of these products aren’t explicitly labelled as SDG, the use of proceeds criteria are often mapped to the SDGs.
Barclays’ and Deutsche Bank’s Sustainable Finance Frameworks both note the relevant SDGs as sub-themes for their use of proceeds and Deutsche Bank references the SDG targets and indicators. Some financial institutions have chosen to explicitly label their frameworks and products as SDG aligned, for example, the BBVA SDG Bond Framework, HSBC SDG bond and SDG sukuk.
In the world of fixed income products, not all SDGs are created equal; some products are influenced by global events, regional priorities and the potential to generate a financial return. Analysis undertaken by Environmental Finance in its Sustainable Bonds Insight report found that in 2021 the bond market was dominated by funding associated with green projects, SDGs 7 (Affordable and clean energy), 11 (Sustainable cities and communities) and 13 (Climate action) representing 46% of the SDGs funded. This is in keeping with the current market trend around net zero and climate initiatives. In 2020, the best funded SDG was number 3 (Good health and well-being), largely driven by supranationals issuing bonds to fund their response to the Covid-19 pandemic.
In recognition of the intrinsic link between the SDGs and green, social and sustainable capital market products, the International Capital Markets Association (ICMA) has released guidance for issuers, investors and bond market participants to help them map the Social Bond Principles and Green Bond Principles to the SDGs and their underlying targets and indicators as well as providing examples of negative SDG-linked externalities.
But ‘use of proceeds’ products do not go far enough. If the SDGs are to be achieved there is also a need to develop products that focus on driving change by measuring and rewarding performance against sustainability-linked Key Performance Indicators (KPIs). In 2019, Enel, an Italian-based energy company, launched the world’s first SDG linked bond, focused on SDGs 7, 9, 11 and 13 with the KPI of “Renewable Installed Capacity Percentage” and a Sustainability Performance Target (SPT) of “equal to or greater than 60% by December 31st, 2022”. Enel has gone on to issue further sustainability-linked finance including a £750 million sustainability-linked bond which was oversubscribed by almost 3 times. The targets used in sustainability-linked bonds need to be ambitious to incentivize a move towards more sustainable practices.
In addition to ‘use of proceeds’ and sustainability-linked instruments, the SDGs are also being employed by financial institutions to prioritise and allocate capital as well as in reporting. The Aegon Global Sustainable Sovereign Bond Fund selects countries based on their performance against the SDGs and Saturna Capital details the percentage of holdings in its Sustainable Bond Fund reporting by SDG and analyses whether reporting is supported by data and quantitative targets.
Global Sustainable Sovereign Bond Fund (GSSBF) by Aegon Asset Management
The Fund invests in government bonds from countries which are demonstrating significant progress towards meeting the UN SDGs. The asset manager “aims to add value by investing in financially strong countries that contribute to the improvements in sustainability targets as defined by the UN SDGs. The Fund leverages Aegon Asset Management’s proprietary research methodology and multi-decade expertise as active owners of sovereign debt. The managers utilise country-level analysis and top-down assessments to optimise regional and SDG-specific concentrations.”
Aegon Asset Management bases its sustainability methodology on the works of the Bertelsmann-Stiftung and Sustainable Development Solutions Network (SDSN) partnership, sponsored by the United Nations. The transparent scoring methodology uses more than 100 indicators per country and covers 172 countries across the world.
Although financial institutions embedding the SDGs within their products and practices is essential for their delivery there is still limited guidance in the market on what this means in practice. To address this issue, SDG Impact (part of UNDP), has been developing the SDG Impact Standards, voluntary internal management standards designed to help businesses and investors embed sustainability and the SDGs into their management systems and decision-making practices.
The SDGs need to be fully embedded by financial institutions in fixed income products, including in investment appraisal, monitoring performance and reporting progress.
SDG Financial Products was launched at COP26 by GEFI and showcases commercial financial products that are aligned to the SDG in order to share learnings and grow the ecosystem of SDG aligned financial products across asset classes.
The SDG Impact Standards provide guidance on developing an appropriate strategy, management approach, transparency and governance to assist businesses and investors in contributing positively to sustainable development and achieving the SDGs. The Impact Standards also provide a decision-making framework to make sense of existing relevant principles, frameworks and tools.
