The UN's Sustainable Development Goals are the roadmap for creating a more sustainable world by 2030. However, the funds available to the 195 signatory states for implementing the goals are limited. The private sector must therefore also make a contribution.

By Franziska Raff, Head Communications at LGT Capital Partners

According to experts, around $1.5 trillion is required from the private sector in order to initiate a step change toward greater sustainability. This raises the question of how investors can contribute to the implementation of the Sustainable Development Goals (SDGs) and at the same time achieve their target returns.

To make this possible, the SDGs must be «translated» into concrete investment opportunities.

Opportunities For Bond Investors

In the bond space, investors can invest according to the SDGs through green bonds and their offshoots – social, sustainable and blue bonds. This could help to further increase the popularity of these bonds. Because to date, green bonds account for only about one percent of the international bond market.

This asset class is growing quickly, however. By 2020, it is expected that green bonds totaling USD 200 billion will have been issued. Although green bonds were initially primarily issued by development banks, the range of issuers has broadened considerably. In 2018, 25 percent of these bonds were issued by government entities and government-affiliated corporations, 30 percent by financial institutions, 18 percent by companies and 9 percent by development banks. The geographic distribution of green bonds has also become more diverse in recent years.

Considerable Geographic Reach

In 2018, Europe accounted for 40 percent of global issuance, Asia Pacific for 29 percent (of which China for 19 percent) and the U.S. for 21 percent. The fact that the issuers come from 46 different countries illustrates the considerable geographic reach of this asset class. New entrants to the market, such as Iceland, Lebanon, and New Zealand, are also contributing to this greater reach.

These bonds are suited to support the SDGs because the capital raised is invested in a targeted manner in line with the SDGs. For green bonds, for example, the «target spectrum» ranges from renewable energy projects and buildings designed in an environmentally friendly manner through to sustainable transportation solutions and clean water.

The Recent Offshoots of Green Bonds

In the last three years, new, targeted bonds have emerged that are considered offshoots of green bonds. Social bonds, for example, can serve to finance projects such as basic infrastructure, access to health care and education or affordable housing, in the same way, that green bonds support environmental projects. In 2018, $14 billion in social bonds were issued.

In the same year, sustainable bonds reached a volume of $17 billion; these fund projects with both social and environmental objectives. So-called blue bonds, which were first introduced by the World Bank, cater to a smaller niche in the market. They finance sea and ocean-related projects that aim to benefit the environment, economy, and climate. Whether social, sustainable or blue, these bonds offer investors a large selection of projects that they can support with their sustainable investment decisions.

Achieving the SDGs Through Targeted Bonds

Thanks to the approach taken for green bonds and their offshoots, they can make a significant contribution to the achievement of the SDGs. Their trajectory to date shows that substantial funds can be raised for specific environmental goals. The better the standards of transparency and reporting become in this segment, the faster inflows are likely to increase.

Initial, larger initiatives for harmonizing and increasing transparency have already been launched. For example, the EU Action Plan for Sustainable Finance, which outlines the development of a uniform classification system (taxonomy) for economic activities that can be considered environmentally sustainable. The taxonomy will enable investors to make better-informed investment decisions with regard to the intended impacts. In addition, the new taxonomy will be harmonized with the SDGs to make it possible for investors to pursue dedicated sustainable development objectives.

Even though these types of initiatives are still in their early stages, LGT Capital Partners expects green bonds and their offshoots to take on an increasingly important role in investors’ SDG-based allocation decisions.