Thematic Bonds and How to Deliver More Sustainable Finance in Developing Economies

Sustainability-themed bonds are growing in popularity, including among development practitioners who view them as promising instruments in the delivery of more, especially climate, finance in developing economies. This UNDP Development Futures Working Paper provides an overview of the thematic bonds market and a discussion of issuer incentives as well as some of the main challenges related to additionality and credibility. To improve the potential of thematic bonds as a tool for sustainable and equitable development, the paper proposes five features that any official sector-supported model should prioritize. These features aim to deliver substantially lower funding costs for ‘green activities’ and improve market access as well as the credibility of bonds, which include strengthening issuer commitments to ambitious targets and incentives to implement climate-friendly policies. Finally, it is important to recognize the limitations of donor-supported models. High debt burdens in many countries limit the use of debt instruments, and these will compete for limited official sector funds with other, potentially fairer, means of delivering climate finance.