Why supranationals and agencies are at the vanguard of sustainable development
As the demand for sustainable fixed income grows, a relatively small and often an overlooked alternative to sovereigns can offer an attractive yield pick-up despite their similar credit ratings.
Supranational bonds are issued by entities formed by two or more central governments to achieve a shared goal, which is often sustainable in nature and aligned to the UN’s 17 Sustainable Development Goals (SDGs). They address the needs of investors looking to fit fixed income investments that support sustainable development into a broader portfolio of sustainable investments.
Over the years, global fixed income markets have moved a long way in terms of sustainable investing and there has been significant progress made to overcome some of the complexities associated with it. Corporate bond markets have been leading the way and now are very much part of a credible sustainable fixed income solution.
Significant inroads have also been made in sovereign sustainability, which has traditionally lagged behind other areas of fixed income. At Schroders we routinely integrate sustainability factors into sovereign analysis and investment decisions. In addition, we have created a clear sustainable framework around different countries’ UN SDGs.
Multilateral Development Banks (MDBs) by their very nature seek to finance sustainably aligned objectives. In collaboration with other development organisations and governments, they are committed to sustainable development via the provision of grants, loans and technical assistance. Often their focus is on supporting poorer nations in facilitating their progress toward the SDGs.
Grants and funding are provided for a diverse range of projects which cover the full selection of sustainable goals. From the prevention of plastic marine pollution in Asia to funding a digital health project in Tonga. An initiative in Turkey gave support to local commercial banks to provide loans, mentoring and network opportunities to female entrepreneurs in a country with relatively low labour force participation rates for women. All of the projects and initiatives are sustainably aligned toward specific UN SDGs.
The table below shows a selection of supranationals and their commitment to sustainable development.
The International Bank for Reconstruction and Development, one of the organisations that make up the ‘World Bank’ (WB), is one of the oldest Multilateral Development Banks. Founded in 1944, its initial purpose was to support the reconstruction effort following the Second World War. Today, the World Bank1 is the world’s largest source of development finance and plays a leading role in addressing sustainable development.
Its financing is directed towards its twin goals to end extreme poverty and promote shared prosperity. Just one of the ways that the WB’s International Development Association has contributed to the goal of ‘Quality Education’ is through supporting the rolling out of free schooling in the Democratic Republic of Congo. However, there are numerous examples of how the WB’s affiliates are targeting specific SDGs.
If anything, the Covid pandemic has highlighted how effectively these supranational institutions can work to effect change and support countries’ progress towards sustainable goals. The World Bank’s swift response to the pandemic saw it establish a Covid Fast Track facility aimed at providing emergency support - including vaccine acquisition and deployment - for almost 100 countries.
Similarly, the pandemic catalysed a more integrated response across the European Union (EU) with the aim of supporting the region’s recovery. Recent EU bond issuance through ‘Next Generation EU’ programmes has focused on fighting climate change, improving and protecting biodiversity and promoting gender equality.
The European Bank for Reconstruction & Development (EBRD)’s recent commitments 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 ‘Green Economy Transition’ programme. One such area of work being spearheaded is in the circular economy, where the EBRD is collaborating with other financial institutions and corporates towards a ‘progressive dematerialisation of economic activities’ as well as promoting recycling and reusing of materials.
The table below shows a few examples of how Multilateral Development Banks are contributing towards UN SDGs
Source: Schroders, Islamic Development Bank (Financing the Sustainable Development Goals – The contributions of multilateral development banks).
These examples provide a small glimpse into the sustainable work carried out by these institutions and the numerous projects providing full coverage of the UN SDGs.
Supranationals are powerful engines of sustainable change. In fact, supranationals are high scoring within Schroders’ sustainability model, SustainExTM2, recognising the positive externalities. Furthermore, through thought leadership, these institutions are at the forefront of engagement. Their work has a powerful influence on corporations, agencies and even governments, and their sustainability aligned agendas contribute to sovereigns’ progress towards their sustainable development goals.
We should just mention though, that while on the whole these institutions are promoting sustainable change, given the breadth of coverage, on occasions they have been caught up in controversial practices. Like any corporation or country, MDBs have room for improvement.
Nevertheless, supranationals were pioneers in the issuance of sustainably-linked bonds, issuing their first green and climate bonds nearly 15 years ago. The European Investment Bank issued its first Climate Awareness Bond in 2007 and issuance has grown sharply since, helping to finance renewable energy and energy efficiency projects all over the world.
However, while the sustainably linked bond market is growing rapidly, it is still quite small relative to overall bond issuance. Even though the market is still relatively thin, we do invest in green and social issues where we see fit.
Overall, we think that attractive valuations and yields, combined with diversification benefits and sustainable alignment, will mean that investor attention towards supranationals and agencies looks set to intensify in the period to come.
- The 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 Centre for Settlement of Investment Disputes (ICSID).
- Schroders uses SustainEx™ to estimate the net social and environmental “cost” or “benefit” of an investment portfolio having regard to certain sustainability measures in comparison to a product’s benchmark where relevant. It does this using third party data as well as Schroders own estimates and assumptions and the outcome may differ from other sustainability tools and measures.
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