Innovative infrastructure financing |
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Green bonds |
Raise new capital for projects with a specific purpose (eg, climate mitigation) from investors who want to invest in a climate-friendly initiative, without being exposed to risks associated with individual projects. Creates a long-term fixed-income security that can be traded—given a liquid market. First product standardisation efforts have already been made.
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Social impact bonds |
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Business practices |
Overcome political constraints to pay for prevention measures (eg, health prevention). Expand risk and return assessment of investments to non-financial dimensions. Enable the creation of new financial products attracting investors who are interested in climate-friendly/health-friendly investments. Expand ESG criteria to ESG+H including health thereby broadening the asset class to a wider group of mainstream investors.
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Approach
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Challenges
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Innovative infrastructure financing |
Good credit rating of the sovereign that backs the bond might limit the availability of the instrument to more creditworthy countries. Each project depends on a variety of different risk factors (competition, security package, counterparty risk, technical risks, availability of labour and materials and event risks) which might make standardisation difficult. Regulatory framework might have to be adapted.
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Green bonds |
Bonds need to ensure to have investment grade, that is, a good rating that allows institutional investors to integrate the bond into their portfolio. Scalability of such bonds still needs to be proven: sufficient availability of suitable projects and liquidity as the market is still relatively small).
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Social impact bonds |
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Business practices |
Measurability of social outcomes limits the range of suitable projects. Pay for Performance scheme introduces additional risk. Distrust in the market to incorporate non-financial indicators into risk assessment. Need to formulate key health criteria for incorporation in ESG+H framework. Need to build framework for health criteria inclusion in corporate reporting, stock exchange criteria and responsibility frameworks.
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