african States Leverage Sustainability-Linked Debt to Attract investment
Several African nations are turning to sustainability-linked debt (SL debt) to attract investors increasingly focused on Environmental, Social, and Governance (ESG) factors.Unlike traditional green bonds dedicated to specific environmental projects, SL debt ties financing costs to the achievement of pre-defined sustainability targets, offering a broader scope for impact and incentivizing long-term policy commitment.
The World Bank is playing a key role in facilitating this trend, offering a tool called the Financing alignment for Biodiversity (FAB) to help countries set ambitious yet achievable ESG targets.The FAB portal, drawing on data from the Sovereign ESG Data Portal covering 213 economies and 171 indicators, allows users to assess targets based on both feasibility and ambition. The system avoids setting targets that are either too easily met or unrealistically difficult to achieve. For instance, the Bank’s data revealed that no country had successfully achieved 100% rural electrification within seven years, suggesting a particularly ambitious target deserving of recognition.
Evaluating ambition remains a complex process, requiring consideration of individual country circumstances. While past performance in areas like carbon emission reduction can offer insights, differing economic conditions and technological advancements necessitate a nuanced approach. The World Bank prioritizes identifying comparable countries based on factors like regional similarity,economic advancement level,and income category.However, the FAB tool is designed as a “decision support system,” allowing users to select their own comparators and providing the data without prescribing specific benchmarks.
The data-driven approach provides issuers with a factual basis to demonstrate their commitment to investors. The World Bank also aims to assist countries in identifying targets that yield both ESG benefits and economic gains. Improvements in areas like education and electricity access are expected to contribute to GDP growth, enhancing a country’s creditworthiness.
A challenge within the market is that some investors, accustomed to green bonds, do not currently view SL debt as having direct ESG “impact” due to the funds not being earmarked for explicitly green projects. However, others recognize the potential for “systemic impact,” supporting countries and development banks in achieving broader policy goals, such as improved forestry management.
According to Wang at the World Bank, the impact of SL debt is both direct – through measurable targets – and indirect.The consistent measurement required by slfs fosters improved data collection within countries, addressing a common issue in emerging markets where monitoring systems often lapse due to funding shortages.Investors are increasingly focused on the “counterfactual” - how a country would develop without the enduring transition path outlined in the SL financing. They carefully scrutinize what would happen regardless of the financing, and appreciate the structure’s ability to hold countries accountable for targets extending beyond electoral cycles.
Frisari of the World Bank highlights the current global policy volatility, emphasizing that SL debt provides investors with a financial incentive for issuers to adhere to their stated objectives, allowing those who “can see the forest and not just the trees” to invest with confidence.
