The development community is struggling to mobilise private finance
to deliver the United Nations’ Sustainable Development Goals (SDGs).
Private investors are increasingly keen to adopt environmental, social
and governance (ESG) criteria and deliver impactful investment, but a
lack of consistent incentives means that development finance
institutions (DFIs) are failing to stimulate SDG-aligned private
capital. The CORL bond provides a potential solution.
The structure enables DFIs to provide credit enhancement, if an
issuer reaches its resilience or sustainability targets. By using an
option-pricing approach for Sustainability-Linked Bonds (SLB), we show
that it is possible to structure step-down SLBs with fixed coupons
priced at the same level as equivalent vanilla bonds.
Importantly, this means that with relatively modest credit enhancement, CORL bonds can be structured to offer sizable and incentivising step-downs. They are attractive to investors, while the concessionary capital commitment remains small.