Thematic Bonds: Essential Tools for Development
In 2015, UN countries agreed on the 2030 Agenda for Sustainable Development, including 17 Sustainable Development Goals (SDGs). Reaching these SDGs, explains the UN, will lead to “a safer, healthier and more equitable world for present and future generations.”
Against this backdrop, Latin America and the Caribbean (LAC) face great challenges to ensure their economic sustainability. Securing business development in the region is a primary concern, generating a fertile ground for promising opportunities. Hence, development issues are now approached comprehensively, acknowledging the need to balance economic, social and environmental sustainability.
A 2017 report by the Business and Sustainable Development Commission (BSDC) estimates that investors could generate more than $1.2 billion by investing in sustainable opportunities deriving from the SDGs. The report calculates LAC's regional economic value and states that the region's private sector may enjoy healthy and strategic business opportunities by investing in the common good.
Thematic bonds and development
More than a decade ago, financial markets saw the potential of investing in development with the creation of green, social, and sustainable bonds. The result was ideal even though these bonds were structured individually and had a specific purpose.
Over time, the region saw the need to appropriately invest in instruments issued by the stock exchanges in each country, uniting the efforts of local companies and banks. The aim was also to attract local and international investment, using funds to advance green, social or sustainable projects.
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nnual investment between $75,000 and $80,000 billion to comply with the Paris Agreement. That is why IDB Invest decided to contribute with the creation of a new class of bond asset, called thematic bonds.
The bond market is already seen as a suitable instrument for large-scale, low-risk issuers and assets, but thematic bonds provide a solution in debt capital markets to exclusively finance green, social and/or gender-focused projects. By coexisting in such a manner, they become comprehensive instruments. For example, financing a combination of green and social projects also makes it possible to issue sustainable bonds.
Thematic bonds also pose several benefits for issuers, such as:
- Accessing investor groups with social and/or green approaches, which would otherwise not be possible with standard bonds.
- Strengthening the positioning of their brand, their environmental and social strategy, and their corporate governance, thanks to the higher levels of transparency and commitment that are achieved with investors.
- Generating a positive impact on their business environment.
- Positioning themselves as relevant players in the growing sustainable financing market, subject to increasingly higher standards.
Present and future of thematic bonds
The world has become aware of the challenges facing the capital market and efforts toward greater commitment, by way of environmental and social investments, more transparent practices, and relying on second parties that can verify and guarantee the adequate use of resources.
With this new class of asset on the market, it is highly necessary to start using standardized instruments to quantify, measure and disseminate their impact. The role of investors such as IDB and IDB Invest becomes crucial in the design and monitoring of these investments through to the transfer of knowledge.
Some of the most relevant operations that IDB and IDB Invest have recently supported include:
- The first green sovereign bond by a State in Latin America: Chile.
- The world's first sovereign social bond, issued by the Government of Ecuador, with a guarantee backed by the IDB.
- Ecuador's first green bond, issued by Banco Pichincha and partially underwritten by IDB Invest.
- First gender-focused social bond in the region, issued by Banistmo and acquired in its entirety by IDB Invest.
- Colombia's first sustainable bond, issued by Bancolombia and underwritten entirely by IDB Invest.
IDB Invest has been working assiduously with thematic bonds and will keep up its management and leadership to contribute to the global sustainable business trend. Furthermore, we will continue to create new classes of assets through our financial products, providing technical assistance and disseminating acquired knowledge throughout Latin America and the Caribbean.■