In a move that marks a new frontier in impact finance, Iceland has issued the world’s first sovereign gender bond, raising €50 million ($54 million) to fund initiatives aimed at improving the welfare and financial health of women. This bond, arranged by BNP Paribas and purchased by Franklin Templeton in a private placement, will finance projects ranging from affordable housing for low-income women to initiatives redistributing unpaid care work, setting a precedent for how countries can use capital markets to advance gender equality goals.

Iceland also made its debut in the green bond market earlier in 2024. The country produces 99.9% of its electricity through renewable sources. The €750 million 10-year green bond was met with high demand, bringing in over €7 billion. This marked Iceland’s largest ever order and potentially included a “greenium” — a premium for green bonds. The country’s sustainable financing framework receiving the highest “dark green” rating from Cicero.

What are impact bonds?

Impact bonds are financial instruments designed to raise capital for projects or activities with positive environmental or social outcomes. According to the Brookings Institution’s Global Impact Bonds Database snapshot from August 1, 2024, there were 259 impact bonds contracted globally across 40 countries. These include 240 Social Impact Bonds (SIBs) and 19 Development Impact Bonds (DIBs). The impact bond market has diversified to include various types such as green bonds, social bonds, sustainability bonds, blue bonds, and of course, gender bonds.

Some history

The first social impact bond (SIB) was implemented in the United Kingdom in 2010, to reduce recidivism rates at Peterborough Prison. The new financial instrument made way for future impact bonds globally. The Peterborough SIB raised £5 million from 17 investors to fund interventions for short-term prisoners. This UK initiative inspired similar models in other countries, including the United States. In 2012, Goldman Sachs financed the first social impact bond in the US, a $9.6 million loan targeting recidivism reduction among adolescents at Rikers Island prison in New York City. The US project, while modeled after the UK’s Peterborough SIB, had some key differences, including the involvement of Bloomberg Philanthropies, which provided a $7.2 million grant to partially guarantee the loan.

The impact bond market has diversified to include various types such as green bonds, social bonds, sustainability bonds, blue bonds, and of course, gender bonds.

From around the world

Since those beginnings, impact bonds have expanded beyond traditional social issues to address critical global challenges related to sustainable development. In 2017, the International Committee of the Red Cross (ICRC) launched the world’s first Humanitarian Impact Bond (HIB), another financing mechanism designed to fund physical rehabilitation services in conflict-affected areas. The initiative provided services to over 3,000 persons with disabilities in the Democratic Republic of Congo (DRC), Mali, and Nigeria. The HIB was structured with initial funding from social investors like Bank Lombard Odier and New Re, which was later reimbursed through payment-by-result agreements with outcome funders, including the governments of Switzerland, Belgium, Italy, the United Kingdom, and “La Caixa” Foundation. Despite challenges such as COVID-19, military coups, and peaks of violence, the ICRC says the project achieved its objectives, with the rehabilitation centers operating 9% more efficiently than the benchmark center.

Image Courtesy of the Stone Family Foundation

In another example, the $9.9 million Cambodia Rural Sanitation Development Impact Bond aims to eradicate open defecation and improve sanitation in rural Cambodia by 2025. It is the world’s first DIB focused on sanitation. The Stone Family Foundation provides the upfront investment capital, while USAID repays the foundation based on the results achieved — in this case, the number of open defecation-free villages.

Image Courtesy of the Stone Family Foundation

One of the most successful examples is the Educate Girls Development Impact Bond in India, which aimed to improve education outcomes for girls in Rajasthan. The project exceeded its targets, achieving 116% of its enrollment goal and 160% of its learning target, resulting in a 15% return for investors. Safe to say that impact bonds have been cemented as a reliable and flexible financing mechanism to address social and environmental challenges globally, including increasingly in the environmental space.

The green bond market

The green bond market has grown quickly in the last few years, with global sales expected to continue similarly in 2024. According to the UK-based Climate Bonds Initiative, green debt sales worldwide jumped 40.7% year-over-year to $173.08 billion in the first quarter of 2024. This is the largest quarterly issuance in over four years. European issuers accounted for more than half of the total green bonds sold in this period. The United States ranked as the top issuer by country, selling $26.06 billion of green debt. This growth is expected to continue, pushed forward by an anticipated fall in interest rates later in the year. The introduction of new standards for green bond sales in Europe, set to be implemented in January 2025, is also expected to bolster the market by improving transparency, comparability, and credibility.

In November 2023, Brazil launched its inaugural $2 billion sovereign sustainable bond. This is a significant milestone in the country’s commitment to sustainable development. This issuance followed the establishment of Brazil’s Sovereign Sustainable Bond Framework in September 2023, which allows the country to issue green, social, and sustainability bonds. The bond’s proceeds are allocated to various initiatives including deforestation control, biodiversity conservation, climate change mitigation, and social programs to combat poverty and hunger. Elsewhere, Masdar, the UAE’s clean energy company, raised $1 billion through its second green bond issuance to fund new renewable energy projects globally around the same time as Iceland. The Forests Bond issued by the International Finance Corporation supports the conservation of tropical forests in Kenya to reduce greenhouse gas emissions.

In the United States

In 2016, Quantified Ventures introduced the first EIB in the US in partnership with DC Water to fund a $25 million green stormwater infrastructure project. Since then, the company has collaborated with various municipalities to implement this approach, notably on the first publicly offered EIB with the Atlanta Department of Watershed Management, a $14 million bond financing six green infrastructure projects in economically and environmentally distressed neighborhoods.

These bonds commit to predicting, evaluating, and disclosing the environmental outcomes of funded projects, aligning with the ICMA Green Bond Principles and the UN Sustainable Development Goals.

Blue Bonds

Closely related to Green Bonds, Blue Bonds for Ocean Conservation have also come up as an innovative financing mechanism to support marine conservation and sustainable use of ocean resources. The Nature Conservancy’s Blue Bonds for Conservation model helps island and coastal nations refinance their national debt in a way that brings in funding for conservation activities, such as protecting coral reefs, mangroves, and other important marine habitats. Successful blue bond projects have been implemented in the Seychelles, Belize and Barbados. By allowing private investment, Nomura Greentech says blue bonds help countries meet their commitments to protect 30% of the ocean by 2030 in line with UN Sustainable Development Goals.

Image Courtesy of the Stone Family Foundation

Private entrants

Major corporations join sovereign issuers in tapping this growing source of sustainable finance. In April 2024, RWE, one of Europe’s leading renewable energy companies, successfully issued its first US dollar green bond, raising $2 billion in a dual-tranche offering. The bond, which was 3.8 times oversubscribed represents the growing appetite for green financial instruments. RWE plans to use the proceeds to finance renewable energy projects under its Green Financing Framework, supporting its ‘Growing Green’ investment program. This program aims to invest €55 billion net globally in renewables, batteries, flexible generation, and hydrogen projects by 2030.

The future

As the market matures, one can expect to see larger-scale projects and increased involvement from emerging markets. Like any other, the sector faces several challenges, including the need for standardized impact measurement and reporting, balancing financial returns with social and environmental outcomes, and addressing concerns about “impact washing”. As impact bonds continue to evolve, they have the potential to play a significant role in achieving Sustainable Development Goals, bringing together public, private, and non-profit sectors. New types of thematic bonds, such as blue bonds for ocean conservation and gender bonds for promoting gender equality expand the limits and versatility of this financing model.