On the sidelines of the 2023 ECOSOC Financing for Development Forum, Sida and Rwanda held a thought-provoking side event on the concrete actions needed to scale private and institutional investments for the SDGs through sovereign SDG bonds. The event was supported by the GISD Alliance, UNDP, UNDESA and the INFF Facility.
The discussion brought together government officials, investors, and representatives from international finance institutions, donors, and UN agencies. It highlighted the potential impact sovereign SDG bonds can have on mobilising and aligning financing with the SDGs and the essential role each partner can play in enhancing this market.
“Many of us in this room have been part of these kinds of discussions over recent years, but this event stands out in that it really shows the power of inclusive public-private dialogue. It is great to see how everyone is really leaning in,” said Carin Jämtin, Sida’s Director General.
Building on a series of previous conversations, the event unpacked underlying challenges and outlined the tangible actions and partnerships needed to support broader and responsible use of debt instruments for the SDGs.
In case you missed the event, we summarised the top 5 takeaways below. You can also watch the event recording.
1. Sovereign SDG bonds have the potential to mobilise private capital for sustainable development at scale.
The private sector panellists made one thing very clear: investor interest in sovereign SDG bonds is there. Yet, to significantly move the needle on SDG finance, we need to scale the market beyond a few isolated examples.
To do this, investors pointed to three key areas: (1) de-risking private investment through the use of incentives, blended finance and guarantees; (2) creating clear linkages to SDGs targets with robust monitoring, verification and reporting; and (3) supporting roadmaps and strategies at the country level (through, for example, INFFs) to clearly outline financing needs.
The 2023 Financing for Sustainable Development Report makes several recommendations, from tax incentives for issuers and investors to mechanisms for mitigating risks. But, as Marcos Neto, Director of UNDP’s Sustainable Finance Hub, pointed out, incentives have to work both ways, for the private and public sectors, which means making sustainability bonds more affordable and attractive for governments in the long term.
2. Countries are using integrated national financing frameworks (INFFs) to strategically place SDG bonds within cohesive national financing strategies.
We are in a period where risk levels – both real and perceived – have increased. This includes sovereign debt risk in developing countries. The instruments we use to mobilise private capital need to be designed and implemented within a broader framework that (a) accounts for these risks and (b) sets out concrete actions to build the environment and capacities necessary for successful implementation.
Over 80 countries are using INFFs to structure options for financing their sustainable development ambitions. They are bringing together planning and financing policy processes, identifying effective financing instruments through a national strategy and managing risks in a cohesive way.
We heard from Yanuar Nugroho, Expert Coordinator at the National Secretariat of SDG Implementation in Indonesia, where the government is using the INFF process to integrate lessons from its experience with thematic bonds (Indonesia’s total thematic bond issuance is more than USD 7.8 billion) within a national financing strategy. (Read more about Indonesia’s experience in UNDP’s latest brief on INFFs and sovereign thematic bonds.)
Claver Gatete, UN Permanent Representative, explained how the INFF process in Rwanda is bringing together relevant stakeholders to improve evidence-based decision-making. “We are looking at where there are weaknesses, where there are gaps and then deciding how to fill those gaps together as a steering committee of government and development partners,” said Mr Gatete.
A key point reiterated throughout the event: country experiences with INFFs to date underscore the importance of planning. Countries are creating roadmaps that outline financing needs and project pipelines aligned with national priorities and are anchoring these plans within considerations of debt sustainability, making it easier for investors to come in and play an impactful role.
Anna Wallenstein, Regional Director of Sustainable Development in Latin America and the Caribbean at the World Bank, summarised this point: “Development results should be looking for financing solutions to make them happen, not the other way around.” We need to lead with country needs to ensure sovereign SDG bonds are actually directing money to where it’s needed most.
3. Getting blended finance right is a key step. Governments, donors and development banks have an essential role to play in de-risking private investment.
According to private investors taking part in the discussion, for sovereign SDG bonds to work at scale, incentives and blended finance mechanisms are needed to enable appropriate returns, especially in riskier environments. Most panellists were in resounding agreement that this was the critical step needed to unlock private financial flows.
The speakers expressed an interest in exploring innovative ways to incentivize private investment, including blended finance and guarantees. Sida is open to discussing opportunities, together with other guarantee providers, on how to de-risk. Development banks and funds, like the European Fund for Sustainable Development and the Nordic Development Fund, could be used for early and catalytic investments to unlock private investment. Multilateral Development Banks, like the World Bank, will play a critical role in lowering risk levels and supporting the project pipeline development.
Rwanda offered an example of how this could work in reality. Ireme Invest, a ground-breaking new green investment facility launched through the Rwanda Green Fund and the Development Bank of Rwanda, is pooling money from the World Bank, the Rwandan government and European development funds to de-risk private sector investment in projects linked to the SDGs.
4. Regulation, standardisation and monitoring: Ensuring finance is getting to where it’s needed most
Panellists agreed that regulation, standardisation and monitoring were all essential elements for translating growing investor interest into actual investments at scale. This is an area where development partners, like the UN and the World Bank, can step in to provide valuable support.
“We want to see the linkages to SDG targets and indicators; we like second opinions and verification and annual reporting,“ said Gavin Power, Executive Vice President and Chief International Affairs and Sustainable Development at PIMCO. This explicit (and verified) link to the SDGs is important for legitimising these instruments in the eyes of both governments and investors.
Indonesia offered an example of how this is being done in reality. The country applied its nationwide SDG budgeting tagging approach to their thematic bonds, linking money spent with purpose and outcomes. They’ve also developed a securities framework to ensure each thematic bond is aligned with international standards and subjected to external reviews in line with best practices and post-issuance annual reporting. “We need to make sure that the aggregate of those outcomes actually contributes to the achievement of outcomes that are aligned with the SDGs,” said Mr Nugroho.
5. Public perception is important. We need to make sure everyone has a seat at the table.
Meaningful engagement of all sectors within and outside of government is necessary for these instruments to be successful. “What people think is going on is super important. I don’t think we can underestimate the importance of politics and social acceptability,” said Ms Wallenstein.
Making sure that civil society, businesses, both large and small, and the financial sector are engaged in the process of designing and issuing these bonds will go a long way to improve the quality and integrity of the instruments. Continuous feedback and dialogue between all stakeholders (through events like this one) will create a stable environment from which good decisions can be made, further minimising risks for investors and governments.
In many countries, the process of developing an INFF is already helping governments establish or improve the enabling environment. In over 80 countries, governments are using the INFF process to embed sustained engagement with civil society and the private sector within financing and planning systems. This level of transparency and inclusion “is a critical piece of political de-risking,” reflected Mr Neto.
