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.
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