Supranational bonds are issued by entities formed by two or more central governments to achieve a common goal, which is often sustainable in nature and aligned with the 17 United Nations Sustainable Development Goals (SDGs). They meet the needs of investors looking to integrate fixed income investments that support sustainability into a broader portfolio of sustainable investments.
Over the years, the global fixed income markets have come a long way in terms of sustainable investing and significant progress has been made in overcoming some of the complexities associated with it. Corporate bond markets have led the way and are now an integral part of a credible and sustainable fixed income solution.
Important breakthroughs have also been made in sovereign sustainability, which has traditionally lagged behind other areas of fixed income. At Schroders, we regularly integrate sustainability factors into our sovereign analyzes and investment decisions. In addition, we have created a clear sustainable framework around the United Nations SDGs of different countries.
Multilateral Development Banks (MDBs), by their very nature, seek to finance aligned goals in a sustainable way. Together with other development organizations and governments, they are committed to sustainable development through the provision of grants, loans and technical assistance. Often, their goal is to help poorer countries facilitate their progress towards the SDGs.
Grants and funding are provided for a diverse range of projects that cover the full selection of sustainable goals. From preventing marine plastic pollution in Asia to funding a digital health project in Tonga. An initiative in Turkey has helped local commercial banks provide loans, mentorship and networking opportunities to female entrepreneurs in a country where female labor market participation rates are relatively low. All projects and initiatives are sustainably aligned with specific UN SDGs.
The table below presents a selection of supranationals and their commitment to sustainable development.
The International Bank for Reconstruction and Development, one of the organizations that make up the “World Bank” (WB), is one of the oldest multilateral development banks. Founded in 1944, its initial objective was to support the reconstruction effort after the Second World War. Today the World Bank1 is the largest source of development finance in the world and plays a leading role in the fight against sustainable development. Its funding is directed towards its twin goals of ending extreme poverty and promoting shared prosperity.
One of the ways the WB International Development Association has contributed to the goal of “quality education” is by supporting the roll-out of free education in the Democratic Republic of Congo. However, there are many examples of how WB affiliates are targeting specific SDGs.
On the contrary, the Covid pandemic has highlighted how effectively these supranational institutions can work to bring about change and support countries’ progress towards sustainable goals. The World Bank’s rapid response to the pandemic led it to establish a Covid Fast Track facility aimed at providing emergency assistance – including vaccine acquisition and deployment – to nearly 100 countries.
Likewise, the pandemic has catalyzed a more integrated response across the European Union (EU) in an effort to support the region’s recovery. Recent issuance of EU bonds under the Next Generation EU programs has focused on combating climate change, enhancing and protecting biodiversity and promoting gender equality. sexes.
Recent engagements by the European Bank for Reconstruction and Development (EBRD) have also been dominated by the pandemic, alongside a focus on climate change, as it highlights areas of opportunity to support a green recovery. through its “transition to a green economy” program. One such area of work is the circular economy, where the EBRD is collaborating with other financial institutions and businesses towards a “gradual dematerialization of economic activities” as well as promoting the recycling and reuse of materials.
The table below shows some examples of how multilateral development banks are contributing to the UN SDGs.
These examples give a small insight into the enduring work done by these institutions and the many projects that provide comprehensive coverage of the UN SDGs. Supranationals are powerful drivers of lasting change. In fact, supranationals score high in Schroders’ sustainability model, SustainExTM2recognizing positive externalities.
Moreover, through thought leadership, these institutions are at the forefront of engagement. Their work has a strong influence on businesses, agencies and even governments, and their sustainability-aligned programs contribute to Sovereigns’ progress towards their Sustainable Development Goals.
It should be mentioned, however, that while on the whole these institutions promote lasting change, given the breadth of coverage, they have at times been caught up in controversial practices. Like any company or country, BMDs can still improve.
Nevertheless, supranationals have been pioneers in the issuance of sustainability-related bonds, issuing their first green and climate bonds almost 15 years ago. The European Investment Bank issued its first Climate Awareness Bond in 2007 and emissions have risen sharply since then, helping to fund renewable energy and energy efficiency projects around the world.
However, although the permanently linked bond market is growing rapidly, it is still quite small relative to overall bond issuance. Even if the market is still relatively small, we invest in ecological and social issues where we see fit.
Overall, we believe that attractive valuations and yields, combined with diversification benefits and sustainable alignment, will mean that investor focus on supranationals and agencies is set to intensify in the period ahead.
1The World Bank is made up of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the International Center for Settlement of Investment Disputes (ICSID).
2 SustainExMT is a Schroders tool that measures the overall costs and benefits arising from specific activities, and how countries contribute positively or negatively to them.