Capital markets have become a driving force in the race towards a sustainable future, and political leaders have taken note. Since entering the market for environmental, social and governance (ESG) bonds in 2012, governments at all levels have raised a total of $240bn according to the Climate Bonds Initiative. Now, they have a specialised funding tool dedicated to tackling the Sustainable Development Goals.

So-called SDG bonds have been spearheaded by Mexico’s government which opened the market last year with a €750m deal before returning in 2021 with a €1.25bn offering. Uzbekistan and Benin have since followed suit. It is early days, but these bonds are considered a promising way to funnel private capital into SDG projects. 


“We see a lot of potential,” says Luis Felipe López-Calva, regional director for Latin America and the Caribbean at the United Nations Development Programme (UNDP) which supported Mexico on its deals. The UNDP is now working with two other countries in the region on their own SDG bonds. “We’re pushing for governments to go beyond the traditional green bond… to bring along the social aspects, and in some cases things related to governance.” 

Under the bonnet

For governments, these instruments represent a new breed of sustainable finance. While the green bonds that have dominated their ESG issuance to date are earmarked to fund pre-selected assets, SDG bond proceeds feed into the federal budget and are channelled into projects that tackle the UN goals. 

Mexico’s framework is the gold standard. The government mapped its entire federal budget against the SDG’s 169 subgoals and allocates funds to projects that pass a series of filters. For social projects this includes a social gap index which, based on census data on everything from literacy rates to the number of homes with a dirt floor, ensures proceeds support 1345 municipalities concentrated in the country’s underdeveloped south. 

Uzbekistan also tracked its budget to the SDGs, but in a less granular way. “We also discussed with close to 15 ministries and agencies to make sure the projects we are selecting are eligible for the SDG bond framework,” says deputy finance minister Odilbek Isakov. Benin identified eligible projects after aligning its entire policy matrix with SDG targets.

Halo effect

All three countries have issued these bonds in pursuit of a range of objectives beyond raising funds. Establishing a sustainable sovereign bond curve helps develop local capital markets, while the eligibility process disciplines government spending. “[In future] we should use a similar process when selecting projects for budget money,” says Mr Isakov. “Right now 73% of our budgetary expenditure is SDG-eligible… We may not hit 100% but we need to increase this number.”

Mexico’s deputy finance minister Gabriel Yorio González agrees that linking the budget with the SDGs is among the bonds’ most significant outcomes. Another is the “cohesion it creates within the government on how to pursue SDG objectives”, he says. 

For Benin, the motivations are different. The country ranks in the bottom 17% of the UNDP’s human development index and needs SDG bond proceeds to improve its investment credentials. “Without available, clean or cheap energy, we cannot attract investors,” says Arsène Dansou, head of the country’s debt management office. “We cannot wait for private investors to make key investments to tackle our population’s challenges.”

For more developed countries, the sustainability policies and legal frameworks needed to issue SDG bonds can help mobilise foreign investors. “That transparency and clear articulation of a strategy at the sovereign level has a spillover impact on the ground,” says Robert White, head of Natixis’s green and sustainable hub in the Americas, which worked on Mexico’s deals. While FDI was not Mexico’s motivation, Mr Yorio says the bonds do create conditions that make greenfield projects “more attractive for international or local investors”. 

Derisking greenfield

Going forward, the UNDP’s Mr López-Calva hopes these bonds will spur more public and private sector collaboration on SDG-aligned projects. Using the proceeds to derisk assets – through credit enhancements, warranties, mezzanine debt or otherwise – can “crowd in private investment into certain sectors”, he says. “If the private sector sees the risk reduced or return increased, they may be more attracted to these types of investments.” 

David Uzsoki, senior advisor at the International Institute for Sustainable Development, also sees significant potential in this approach. “By taking a subordinated tranche in the structure, governments can derisk the other tranches and leverage their capital by attracting much more private capital,” he says. Uzbekistan’s Mr Isakov foresees the country’s SDG bonds being used in this way. Mexico’s federal budget is not suited to risk-absorption mechanisms, but Mr Yorio says its sub-sovereign bodies could issue SDG bonds for this purpose going forward.

Untapped potential

Natixis sees growing interest from other sovereigns in issuing SDG bonds and has pitched the idea to local government. The latter hold particular potential because their expenditure is “often closely related to the SDGs and they have strong influence at the local level,” says Cédric Merle of Natixis’s green and sustainable hub. Benin has been approached by neighbouring countries looking to enter the market, and Mr López-Calva says Brazil, Peru, Colombia, the Dominican Republic and Uruguay have the right credentials. (Uruguay’s finance minister has told fDi (see p57) the government is working on a different type of ESG bond.)

For issuers, this new instrument makes good financial sense. Soaring demand for ESG paper meant Mexico’s first SDG bond was its second-lowest coupon ever in the euro markets. But they are not within every government’s reach. ”You need data and governance, so you can’t build it overnight from scratch,” says Mr Merle.

Governments need to get a UN body on board to authorise eligibility criteria and report on how proceeds are used. The UNDP started this work with Mexico a decade ago under the guise of the Millennium Development Goals, the SDGs’ predecessor. With investors increasingly wary about greenwashing – borrowers’ use of vague sustainability goals to capitalise on cheap debt – robust and transparent frameworks will be vital to the market’s success. But for governments willing to do the groundwork, SDG bonds could channel significant private money into their sustainability agendas.

This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine. Read the online edition here.