2025 Public Sector Perspectives

Sustainable bonds The sustainable bond market has continued to grow in importance for both issuers and investors. The outstanding size of the market is now $4.5 trillion, of which over $900 billion has been added in sustainable bond issuance in 2024. Sustainable bonds issued in EUR and USD in 2024 have represented around 10% of total volumes; in the EUR market, sustainable bonds represent as much as 25% of issuance. Close to 80% of sustainable bonds come from developed markets and the most dominant label continues to be Green, representing close to 60% of all sustainable bond issuances. Sovereign sustainable bond issuance has also increased over the years, hitting a record $131 billion in 2023, or 14% of total sustainable bond issuance that year. Sustainable bonds allow sovereign issuers to align funding with their sustainable development objectives, while diversifying their investor base and potentially achieving higher demand. Additionally, sustainable bond governance frameworks help increase coordination among ministries, transparency in the selection of eligible projects/key performance indicators, and discipline around impact monitoring and reporting. Even though most sovereign sustainable bond issuance comes from developed markets, it is expected that more emerging markets issuers will make use of this instrument to fund climate and sustainability investments. Improved data availability, disclosure and standardization, as well as adoption of sustainable taxonomies at country level will be key to drive further investor appetite and scale the sustainable bond market in the coming years. Outcome bonds The World Bank has spearheaded further innovation in the sustainable debt capital market through its outcome bond program. Outcome bonds are designed to bring impact investing to fixed income investors. They generate additional financing for specific development projects while passing development outcome or project risks to the bond investor. Structures can vary but typically the principal of the bond is used by the World Bank for its general development lending activities and the World Bank is responsible for repayment of the principal amount. However, all (or a portion) of the interest income paid by the World Bank on the principal amount is directed towards the financing of the development project. Investors accept the outcome risks associated with that project and earn a return linked to the project outcomes. Outcome bonds have the flexibility to address a wide range of development challenges and can be used to finance non-World Bank projects. The size of project financing is limited to the net present value of interest payments made by theWorld Bank on the principal amount of the bond, and investors benefit from theWorld Bank Principal protection. Examples of development projects financed in this way so far include support to COVID-19 response programs by UNICEF, conservation of the black rhino population in South Africa, the provision of clean drinking water to children in Vietnam, and plastic waste collection and recycling in Indonesia and Ghana. 3 Debt for development conversions Since the Belize Debt Conversion for Marine Conservation in 2021, the first where commercial debt was refinanced in a significant quantum, five other countries have closed similar transactions: Barbados, Ecuador, Gabon, El Salvador and Bahamas. These transactions allowed the refinancing of over $4 billion of outstanding debt in the market and generated close to $1.5 billion for long-term conservation and climate programs. Sovereign interest in Debt for Development Conversions has grown ever since, with the recognition that it is a valuable additional instrument in governments’ toolkits that can help them achieve environmental and developmental outcomes, while partially improving debt dynamics. Debt Conversion transactions are now being considered to address issues beyond marine conservation, such as energy, water, food security, education, among others. The US International Development Finance Corporation and the Inter-American Development Bank continue to drive credit enhancement for these transactions, but other development finance institutions (DFIs) and multilateral development banks (MDBs) are looking to deploy their guarantee products to support Debt Conversions. For example, the European Union, through the European Investment Bank, approved a $150 million guarantee to support a Debt for Climate Conversion in Barbados that will unlock resources for climate-resilient infrastructure projects. 4 There is great potential to replicate Debt for Development Conversions at scale and market participants are devising ways to improve the structure, shorten the time to structure/ execute, increase the number of credit enhancement providers, standardize processes, and generate frameworks to define development commitments and identify countries where this solution would yield the greatest benefits. The Task Force on Credit Enhancement for Sustainability-Linked Sovereign Financing launched at COP28 and joined by several MDBs, DFIs and International Organizations aims to address many of these objectives. 5 3 More details can be found on the World Bank website https://treasury.worldbank.org/en/about/unit/treasury/ibrd/outcome-bonds 4 EIB http://www.eib.org/en/press/all/2024-300-inter-american-development-bank-and-european-investment-bank-approve-guarantees-to-support-climate-and-fiscal-resilience-in-barbados 5 https://climatechampions.unfccc.int/wp-content/uploads/2023/12/Joint-Declaration-on-Credit-Enhancement-of-Sustainability-Linked-Sovereign-Financing-for-Nature-Climate.pdf 20 Climate Finance: What Financial Tools are Available to Sovereigns?