Sustainable Development Bonds May Help Fill the Investment Gap

The United Nations estimated that there is a yearly gap of $2.5 trillion in funding for the achievement of the Sustainable Development Goals. Over the last few years, the development and impact finance sectors have developed numerous innovative investment instruments to attract both private and public investors.

In addition to popular layered funds, a fund structure in which risks and rewards are differentiated by investor type, various types of bonds instruments such as green bonds, social impact bonds, and project bonds have emerged.

Sustainable Development Bonds are debt securities issued by private or public entities to finance activities or projects linked to sustainable development. The issuers of SDB’s issue bonds contractually state the interest rate that will be paid and the time at which the bond principal must be returned.

SDB’s can be classified according to several criteria but can be primarily distinguished by the nature of their returns. For some instruments, the return is fixed and does not depend on the performance of the activity while for others the return is directly linked to the success of the program.

Bonds can also be differentiated by their focus sector. With the current instruments available, investors can focus their support on both social and environmental projects around the world. The most common instruments are Green Bonds, Charity Bonds, Social Impact Bonds, Development Impact Bonds, and Environmental Impact Bonds.

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