"Pure play" Environmental, Social and Governance bonds have arrived in the bond market.  What needs to happen now?

There is an investor base eager to find opportunities that can tackle the biggest public challenges of our time. Now is the time to tap it.  

  • 18 January 2024
  • 5 min read
  • by Kenneth G Lay
Credit: Katrina.Tuliao - Flickr, CC BY 2.0
Credit: Katrina.Tuliao - Flickr, CC BY 2.0


It has now been more than 15 years since the World Bank responded to major Nordic pension funds' insistence that the proceeds of their bond investments be directed exclusively to environmentally friendly activities. Around the same time, the European Investment Bank issued its "climate awareness bond". Thus were born the first "green bonds".  

Since then, more than US$ 4 trillion has been raised in thousands of transactions in debt capital markets. Moreover, the basic concept has broadened to include transactions funding investments with social benefits and rewarding issuers' responsible governance practices.  

There is a direct connection between IFFIm investors and protecting the poor in lower-income countries from deadly disease. 

From the start it has been a challenge to ensure that the issuers of these securities direct the proceeds appropriately and implement governance policies as represented. Green bond issuers have included corporations in industries such as automotive, chemicals, and oil and gas. And money is fungible, of course: green bond proceeds that an issuer uses for a laudable "green" purpose may also free up funds that then will finance less laudable activities.  

In 2022, for example, a major US rail company won a high-profile award for issuing the "corporate green bond of the year" – a US$ 500 million issue said to "improve the fuel efficiency of its locomotive fleet and invest in intermodal terminals to promote the shift of freight from trucks to train". At the same time, the company says it operates "the largest and fastest coal loading pier in the Northern Hemisphere". Clearly, things can get complicated for investors trying to incorporate "sustainability" in their investment policies.  

The World Bank and other MDBs, of course, don't face these challenges, since they have a broad public purpose – eradicate extreme poverty on a liveable planet – and a governance framework aimed at ensuring that resources are used for that purpose. Building on these favourable characteristics, since it issued its first green bond, the World Bank has broadened its approach, offering "sustainable development bonds" as part of its holistic approach to financing global public goods.  

Another category of issuer, meanwhile, avoids these concerns altogether, and for one simple reason: their funding is directed exclusively to activities furthering the important humanitarian and environmental objective for which they are created. These "pure play" issuers gained growing support from the investment community, and they deserve even more in the years to come.  

Look at the International Finance Facility for Immunisation (IFFIm): as one of the world's original "social bond" issuers, IFFIm exists solely to finance Gavi, the Vaccine Alliance, by frontloading pledges from sovereign sponsors to support Gavi's breakthrough vaccination work in lower-income countries. More recently, IFFIm also has supported responses to the Ebola and COVID-19 crises.  

While IFFIm doesn't leverage its sponsors' pledges in the conventional sense, it adds materially to their respective fiscal-management toolkits by spreading grant payments into the future, while enabling deployment today of the needed resources.  

IFFIm has a clear and singular purpose: immunisation, which is one of the best health interventions in the world. Gavi estimates it has immunised a billion children, saving 17 million lives over the last two decades. IFFIm investors have helped Gavi achieve this milestone by financing it to the tune of US$ 5.8 billion – 18% of Gavi's budget. There is a direct connection between IFFIm investors and protecting the poor in lower-income countries from deadly disease.  

So, IFFIm offers its investors the proverbial "double bottom line": a competitive rate of return and the indisputable social and economic benefits of vaccinating the neediest today, thus avoiding the huge costs of treating multiple diseases in the future. And for the sovereigns supporting its finances, it offers valuable fiscal flexibility. In IFFIm's case, investors harvest a humanitarian premium – sometimes called a "vaccinium" – a measurable social impact added on to a competitive yield. And with climate change raising the likelihood of more disease outbreaks, Gavi's work and IFFIm's financial support is even more essential.  

Pure play bonds like IFFIm's are not only here now; they are the future. Given the climate and health challenges we face and the realities of the global financial markets – particularly the debt capital markets – we need to focus on ways to aggregate thematically consistent activities, quantify and document the potential for avoided cost, mitigate risk through diversification and bring forward transactions with the scale needed to access global investors' high-grade, liquid bond portfolios.  

There are many more ways that pure play bonds can tap the debt capital markets cost-effectively and with little or no application of scarce public credit from multilateral or national development banks. For example, a bond issued by a facility that aggregates urban energy efficiency investments across both higher- and lower-income countries could attract the credit rating and provide the scale necessary to draw funding from the liquid, investment-grade allocations in investors' portfolios.  

Standing up these transactions is complicated, of course, and margins for investment bankers in the liquid, high-grade segment of the debt capital market are skinny. There's an important role for institutions such as the multilateral development banks or other not-for-profits to use their expertise and convening power to arrange these transactions and prepare them for underwriting and distribution by the usual players. Much to their credit, the World Bank and the Global Environment Facility are moving in this direction, as are the Humanitarian Finance Forum (hosted by the British Red Cross) and others.  

But a great deal more needs to be done – there is an investor base eager to find opportunities that can tackle the biggest public challenges of our time, and do it with the risk-adjusted returns they owe their beneficiaries. Now is the time to tap it.