Sustainability-Linked Bonds and Credit Enhancement: New Approaches for PDB Financing

The investments needed to achieve the Sustainable Development Goals, particularly in emerging markets and developing economies, require the mobilization of more available capital. Public development banks (PDBs) can play a key role in scaling up sustainable finance and driving transformative investments but need access to affordable, long-term funding.

In this context, we assess the suitability of performance-linked debt structures, specifically sustainability-linked bonds, as a source of funding. Combining such bonds with credit enhancements, like guarantees, has the potential to reduce the cost of capital and crowd in investors – both would help to achieve sustainability goals.

As an innovative solution, we propose Contingent Resilience-Linked (CORL) bonds with a partial credit enhancement that is activated if performance targets are reached. This novel concept makes it possible to address fundamental issues relating to sustainable bond markets, in particular reconciling lender/borrower incentives. Finally, CORL bonds could help mobilizing additional private capital through development banks.