By Mack Bhatia
Sustainable Development Goals and Green Financing (Green bonds and Sustainability Bonds)
The purpose of green financing, as stated by the UN Environment Programme, is to increase the level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities. The aim is to align financial systems, working with countries, financial regulators and financial sectors, to direct capital allocation to sustainable development that will shape the production and consumption patterns of tomorrow. Financial mechanisms such as Green Bonds help this alignment as they promote public-private partnerships for sustainable development.
The Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations General Assembly as an agenda for the year 2030. These 17 SDGs are an urgent call for action by developing and developed countries and provide a blueprint for the peace and prosperity for people and the planet. The SDGs also recognize issues related to the planet, such as biodiversity, and to people, such as poverty, and accept that solutions to address all of these issues are interconnected.
Green Finance (or Sustainable Finance) instruments such as Green Bonds, and bonds focused on other thematic issues such as Social Bonds, Sustainability Bonds or Sustainable Development Goal Bonds, can act as a strong bridge to the SDGs.
How are Sustainable Development Goals relevant to Issuers and Lenders?
Each of the 17 goals comes with its respective set of targets and with the corresponding indicators to measure the progress against those targets.
When issuers look to issue a Green Bond or a Social Bond, the project framework must be built around the Green Bond Principles, Social Bond Principles or Sustainability Bond Guidelines. These principles and guidelines, developed by International Capital Market Association (ICMA), encourage issuer transparency and disclosure of the project's details including how the proceeds are intended to be used (use of proceeds), and the reporting process. As per the principles, the annual report should include the list and description of allocated projects and their expected impact.
While developing this framework, issuers can map the use of proceeds with the most relevant SDG. As a next step, issuers can then refer to the respective targets for the specific SDG to measure and report on the impact of their projects. Banks and lenders, on the other hand, can ensure their client’s framework is in line with the expectations of the SDGs. This is especially useful for lenders looking to provide Sustainability Linked Loans (also known as ESG Linked Loan) to borrowers or to their clients.
Although climate action underpins the some of the SDGs (SDG 13) and is a crosscutting theme, issuers have an opportunity to also earmark the use of proceeds to other categories such as Socioeconomic Advancement and Empowerment (SDG 1), Terrestrial and Aquatic Biodiversity Conservation (SDG 14 and SDG 15), Affordable Basic Infrastructure (SDG 3), or Climate Change Adaption (SDG 13). The spreadsheet supplement (download) created by ICMA includes a more detailed listings of SDG targets mapped to the Green Bond Principles and Social Bond Principles. The infographic below is a useful reference to supplement the process as described above.
For reference, this High-Level Mapping to the Sustainable Development Goals developed by ICMA aims to provide a broad frame of reference by which issuers, investors and bond market participants can evaluate the financing objectives of a given Green, Social or Sustainability Bond/Bond Programme against the Sustainable Development Goals (SDGs).
The rapidly growing green finance sphere is already providing capital for assets that simultaneously contribute to climate action and many of the other SDGs. Issuers, corporations and banks, when aligned with SDGs, have an opportunity to make a positive impact through sustainable development and with material benefits. Learn more about Green Bonds and Second-party opinion