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Sustainable Finance

Sustainable Finance/ESG

Sustainable Finance word is used interchangeably by Sustainable Investing and ESG. This report includes videos focused on sustainable finance/sustainable investing/ESG. Before we begin our journey on sustainable finance developments, let’s understand the actors within the sustainable development sector. The report is update with recent figures since it was first published. 

Actors within the Sustainable Development Sector

United Nations is the principal actor driving sustainable development goals supported by the following actors. UN as an umbrella brand networked into different specialized agencies like UNDP (global development arm for sustained development), UN/DESA (home and pioneer of SDGs) and UN Capital Development Fund which focuses on mobilizing both private and public capital for least developed countries. Sustainable FinanceOrganization for Economic Co-operation and Development (OECD), a Supranational Organization headquartered in Paris, with 38 high-income members, is a major international organization driving sustainable development globally. It captures quantum of international aid through Official Development Assistance (ODA), a term coined by OECD’s Development Cooperation Directorate (DAC) in 1969 and a gold standard in international aid. Official development assistance (ODA) is defined by the OECD Development Assistance Committee (DAC) as government aid that promotes and specifically targets the economic development and welfare of developing countries. ODA is the largest source of external finance flows for emerging economies for funding development projects. The definition of ODA grants is revised from time to time and includes a minimum of 25 percent grant elements, among other parameters. (Beyond ODA flows: definition and research framework). UN stipulates a grant ratio of 0.7 percent of GNI for OECD countries towards contribution to ODA. Only a few countries meet the grant ratio target with Sweden leading the group in terms of participation as a percentage of GNI while the US leads in the total amount. In recent years, China, although not a part of the OECD group, is a significant contributor to development assistance. Apart from foreign direct investments and personal remittances which are tuned towards the private sector, the core responsibility of government borrowings is through the issuance of sovereign bonds. (Refer Masala Bond section in this report).Sustainable Finance Other significant forms of external financing assistance in development sector include philanthropic assistance through foundations, international sovereign bond issuance across various multilateral institutions, climate finance through PPP (public-private partnerships) as a critical enabler in forging multi-stakeholders’ alliances among different sets of actors within the development arena. (Beyond ODA flows: definition and research framework). The rise of sustainable finance is a result of the rise in different sources of development external funding facilitated by the PPPs. OECD works with multiple actors within the development sector, including multilateral banks, policymakers and think tanks to layout foundation for social and economic well-being. Multilateral Development Banks or MDBs further form the most vital component of fostering public private partnerships, a key partnership to attract $5-7 trillion worth of capital per year in meeting SDGs target by 2030. MDBs work along Government-backed institutions and are the most critical enablers presently and include multilateral institutions, especially Multilateral development banks, bilateral aid agencies, development institutions, supranational organizations, sovereigns, agencies, among others. These are chief actors who define and promote sustainable finance globally, pivotal to financial innovation. Civic societies through non-profits, think tanks, philanthropists, activists and social change enablers are catalysts in promoting social issues.

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Net ODA – ODA grant equivalent, % of gross national income, 2018 – 2021


OECD (2022), Net ODA (indicator). doi: 10.1787/33346549-en (Accessed on 10 July 2022) | Graph: The middle Road. The definition of OECD ODA flow basis methodology has changed. According to OECD; prior to 2018, the ODA flows basis methodology covered loans expressed on a “cash basis”, meaning their full-face value was included, then repayments were subtracted as they came in. From 2018, the ODA grant-equivalent methodology is used whereby only the “grant portion” of the loan, i.e. the amount “given” by lending below market rates, counts as ODA. The value is in USD 2008 constant prices. Foundations, charitable and religious institutions apart from government-backed organizations are the primary source of concessional finance. Financial Institutions, insurance funds, pension funds and the emerging impact investors are fostering incremental capital in the development sector. Seed accelerators example Y Combinator, Techstars, incubators and start-up platforms like Slush work as catalyst in boosting social entrepreneurship. Social stock exchanges are a step in the right direction to provide liquidity among actors within sustainable development. Angel Investors, Venture Capitalists and even private equity are playing an increasing role in the social impact ecosystem. Corporate social responsibility is another driver of ESG theme globally. Note from Global Sustainable Investment Review 2020 -* Europe and Australasia have enacted significant changes in the way sustainable investment is defined in these regions, so direct comparisons between regions and with previous versions of this report are not easily made. From the report Global Sustainable Investment Review 2020. 

Sustainable Investing/Sustainable Finance/ ESG is now a global mainstream phenomenon with the Global Sustainable Investment Alliance estimating the market at $35.3 trillion in 2020 in five major markets, an increase of 15 percent from its value in 2018. IMF defines Sustainable Finance/ Sustainable Investing as the incorporation of Environmental, Social, and Governance (ESG) principles into business decisions, economic development, and investment strategies. According to GSIA, Global Sustainable Investment Review 2020, the Canadian market accounts for the largest share of sustainable investment assets in the world at 62 percent overtaking Europe with a market share of 42 percent. The other top markets are Australasia at 38 percent, the United States at 33 percent, and Japan at 24 percent. The United States and Canada combined have more than 80 percent of the global sustainable investments during the period covered from 2018 to 2020. 

Graph : The middle Road : Data Source: Global Sustainable Investment Review 2020 | Kindly refer to the note from Global Sustainable Investment Review 2020 | NOTE: European sustainable investing strategy data is based on extrapolation from historic data from the 2018 GSIR report and applying the same proportion to 2020 sustainable investing data across the different sustainable investing strategies. US SIF data extrapolates from numbers provided by a subset of overall respondents in its 2020 Trends report. US and Australasia did not report on the category of norms-based screening and Australasia on the category positive/best in-class screening. Australasia also includes corporate engagement within ESG integration.

The rise in sustainable investment in recent years is strongly enabled by the inclusion of the ESG model among pension funds in Japan. Sustainable Investing has come a long way from following a negative screening of companies and sectors example gambling, and tobacco to incorporating a more action-driven bottoms-up approach including best-in-class screening, ESG integration, sustainable themed sectors, and norms-based investing, impact/community investing, corporate engagement and shareholder action. 1

What’s Environmental, Social and Governance ESG?  

Sustainable Finance

E stands for managing the environment ecosystem with a focus on reducing carbon footprint through climate mitigation and climate adoption. Climate mitigation directly targets reducing carbon emissions through businesses, policies, and interventions while climate adaption signifies a focus on renewable, water and energy efficiency, clean technology, etc. Green and low carbon buildings are key focus areas of US government agencies Fannie Mae and Freddie Mac, two leading global agencies in green securitization. Fannie Mae targets low carbon buildings and financing for energy and water efficiency improvements of at least 20 percent. McKinsey defines S as the community relations between various sets of actors within the business and social ecosystem including labor relations, diversity, and inclusion. Both E and S signify corporate social responsibility for businesses and their role in playing a defining role in promoting social and environmental causes. A lack of a clear quantitative and qualitative model in mapping and calculating outputs based on ESG are impediments to measuring accountability and impact but companies are nevertheless, setting their benchmarks. G relates to governance and best business practices of the company including accounting and disclosure practices, transparency and regulatory management, etc. Better governance factors enable shareholder and societal value over the long term visible through the sustainable performance of companies like P&G compared to Enron. The upcoming EU e-directive and EU carbon neutral policy by 2050 compel organizations to be regulatory compliant for sustaining businesses. Companies compliant with the ESG framework are more likely to add value as compared to companies that lack the foresight in developing sustainable practices. In five ways that ESG creates value, McKinsey outlines top-line growth, cost reductions, reduced regulatory and legal interventions, employee productivity upliftment, and investment and asset optimization as key enablers in generating a long-term advantage. 

Impact Investing

Sustainable Finance
Impact Investing is a more focussed sub set of Sustainable Finance/ Sustainable Investing and ESG. The Global Impact Investing Network, the foremost body, championing impact investment globally defines impact investment as those made to generate positive, measurable social and environmental impact alongside a financial return. The key aspect of impact investment viz a viz other investments is its prime intention to create a positive social or environmental impact. Impact Investing investment philosophy ranges from market driven risk adjusted return to concessional and capital preservation. Impact investing a direct measure of serving underserved markets for social and economic good still ranks $500 billion. Sustainable bonds including green bonds are slowly but steadily rising. One of the most important features of any stock exchange   is to be a market maker in that segment i.e. to buy and sell securities at a spread remains a suspect. Further, social enterprises are patient capital generating positive cash flows over long period of time. There is an ongoing debate as to their potential to give above average return. (Refer the section: The Way Forward). 

Blended Finance

Sustainable Finance

Blended Finance is an integral part of impact investing, a subset of sustainable finance/ investing/ ESG. It will play a critical role in achieving the target of Sustainable Development Goals (SDGs) by 2030. Ahead, there will be more synergies between Blended Finance and SDGs in the development sector. Blended Finance works as a strategic tool for development finance for the mobilization of additional finance towards sustainable development in developing countries. This is a defining change in the scope of blended finance from its work as various financial structuring instruments to its strategic use as a form of finance to eradicate social inequity. Blended Finance is not a panacea for the global development crisis but still works as an innovative way to pool commercial capital to aid risk-adjusted return for development projects. The means to attract additional capital for implementation of SDGs through governments, foundations, and development finance institutions through concessional (soft loans with lower interest rates and/or longer repayment duration) or non-concessional resources or through public or private relationships gives a defining new policy perspective to blended finance. The key objective of blended finance is to catalyze the implementation of Sustainable Development Goals globally. Blended Finance works by offering private investors a first loss guarantee, mezzanine, or senior debt to cushion against potential losses with actors from the development space i.e. donors, multilateral development banks, and development finance institutions taking equity first loss. Subordinated debt or junior equity is the first loss capital cushion i.e. in case of adversity bondholders of subordinated debt incur the losses and are always next in line of cash flows to senior debt or common equity. Although the field proposes a lot of promise, only $81 billion of blended finance has been raised for development work over the last four years according to OECD. Much of the capital is deployed for infrastructure and climate change with Africa attracting 30 percent of total contributions followed by Asia (15 percent). Various kinds of instruments are used to mobilize capital like Shares in CIVs, Guarantees, Syndicate loans, credit lines, and direct investment in companies. One of the major strategic use of blended finance is to enhance funds in the development sector, especially in low and middle-income countries. To attract capital from the private sector especially institutional investors the idea of catalytic first-loss capital evolved. The capital can include both concessional and non-concessional finance, IFC deployed about $560 million of concessional development funds between 2010 and 2016 to support more than 100 projects in 50 countries. This signifies the skew towards concessional finance as part of blending. Development Finance Providers take the first loss capital through guarantees, grants, and insurance working as different ways of blending capital for credit enhancement. Guarantees work in covering the first set of losses while Grants might include a first loss guarantee or deployment of capital without any repayment over a fixed period. Grants also include money for technical assistance for the completion of the project specifically to develop capacity and scale up the business model. While guarantees are the most widely used in blending capital, especially in infrastructure projects, more instruments including pay for success (social and development bonds among others), securitization, hedging, junior equity/ subordinated debt, and collective investment vehicles are incorporated today. 

“To mitigate the risk of currency volatility in Africa, the currency exchange fund (TCX) launched a currency exchange to buffer volatility through swaps and forward agreements. Many development institutions invest in dollar or euro that needs to be converted into the local currency in Africa, therefore open to currency risk. TCX removes the risk by absorbing any loss of capital due to currency fluctuations which can be a huge deterrent for investors investing in Africa.”

Fig: The middle Road

Collective Investment Vehicles rewards cash flows in terms of seniority i.e. senior debt over subordinate debt or junior equity. Collective investment vehicles or funds are designed as special purpose vehicles to attract the pool of capital from different actors including development finance providers, foundations, endowment funds, high net worth people and institutional investors including pension and asset managers.  The structure blends multiple cash flows into tranches – a pay back structure loosely inspired by private equity depending on the risk appetite of investors. The deal flows as a waterfall structure wherein senior debt gets compensated before subordinate debt or junior equity. Junior equity are the last tranches and are compensated with residual cash flows derived after paying senior and mezzanine debt respectively. The structure could have mezzanine trance which is in the middle between senior trance and subordinate trance and has the second line to cash flows from the project. Senior tranche has an investment grade rating for attracting institutional investors. This structure does not follow the usual risk adjusted return compensation since private investors have the first return with a cushion on first loss from the project cash flows. This structure helps in attracting more capital through a preferred return to investors so development providers can diversify to more projects in low or middle-income countries. Another success of blended capital is Danish Climate Investment Fund (KIF) which invests in the renewable sector the sub-Saharan region in Africa. However, still a lot must be done in attracting private capital. As stated before, only $81 billion of blended finance has been generated for development space in four years, a puny amount compared to $100 trillion in global debt capital markets.

Read EU Financing a Sustainable Economy

Rise of Impact Evaluation

Sustainable Finance

A rise in corporate social responsibility and awareness of social issues with the emergence of technology and millennials enhanced moral code among civic societies. To measure the social and environmental impact, impact investing sets standards for measuring social impact. Impact Reporting and Investment Standards (IRIS), managed by GIIN set out performance standard guidelines to measure and record outcomes for impact investing. Impact Evaluation is carried out through Social Return on Investment, a matrix involving multiple stakeholders to define the scope of analysis, identify key performance indicators, calculate monetary values and SROI ratio (impacts/inputs) and manage values through making systems that can capture the value created or destroyed. Impact Evaluation can range from merely computing the percentage of students passing each year for measuring the success of interventions in schools to conducting random control trials which could take years to provide conclusive evidence of the causality of interventions. Another tool to calculate social good or adverse social effects is valuing positive or negative externalities related to the service/product. Lean data methodology is worth a look. 

Microeconomic online courses – Understand Externalities 

Green, Blue, Social, ESG, Sustainability, Sustainable Development Goal and Thematic bonds are derivative of ESG theme. They implement social and environmental good outcomes and collectively termed as Sustainable Bonds.

Overview of Global Bond Market

YouTube: The middle Road: Sustainable Finance 

What are Green, Blue, Social, and Sustainable Bonds? To delve further into sustainable bonds, it’s essential to have a global perspective of capital markets. Global Capital Markets, both debt and equity, play a fundamental role in funding economic activity, especially in well-developed markets — for example, in the US, capital markets funded 73 percent of economic activity. Sadly, until recently, the prime importance of economic growth has been growth in shareholder value. The rise in awakening to the significance of wellbeing, along with monetary growth, has embedded theSustainable Finance importance of positive social and environmental impact within the business ecosystem. Backed by an increase in social activism, empirical evidence-based research, civic societies, corporate social responsibility, and awareness due to proliferation of the internet, sustainable finance/ sustainable/ ESG  investing is emerging as a sunrise sector to address long-pressing issues like inequalities within the global ecosystem. In the US, the debt capital markets provide 80 percent of the financing compared to bank loans, which dominate less developed markets. Well-regulated and functioning capital markets i.e., primary and secondary markets, are the most critical enablers for catalyzing a sustainable economic and social impact. Primary markets facilitate secondary markets through a deep network of market makers. Market Makers add liquidity into the system by both buying and selling securities, including during times of distress. Market makers drive the buy and sell the spread of securities and move credit within the system. During the credit crises, the LIBOR, the benchmark used to gauge short term lending between banks shot up to astronomical levels, undermining loans leading to a credit freeze.

Sustainable Bonds: The Dark Knight

Data Source: Environmental Finance | Graph The middle Road

In 2021 the total sustainable bond issuance stood at more than $1 trillion. Green bonds dominated the issuance with about 52 percent of the total value followed by Social bonds at 20 percent and Sustainability Bond at 18.52 percent. The pandemic has reinvented better ways in helping the development sector with social bonds as one of the significant financial instruments. The European Union, United Kingdom, France, Italy, and IBRD as the biggest issuers in 2021 in this fixed income sector. The global bond market is about $123.5 trillion outstanding securities with the US leading the bond market. (SIFMA July, 2021). Capital markets play a pivotal role in driving business and economic activity, in the US capital markets funded 73 percent of economic activity.

“In 2006, UN PRI, principles of responsible was launched at New York Stock Exchange. The PRI was signed by 32 institutional investors with $2 trillion in asset under management included prestigious CALPERS, a UN PRI board member.”

Emerging as the most direct attempt to catalyse social good and boost social entrepreneurship, Sustainable bonds are becoming a major capital markets tool especially in impact investing sector. Sustainable Bonds are emerging as key financial tool within the Sustainable Finance/Sustainable Investing/ ESG ecosystem. They are regulated financial instruments like other fixed income securities. Emerging as a new asset class, Sustainable Bonds specifically target social and environmental good. Sustainable bonds include Green/Blue Bonds cater primarily to climate change, life below water and life on land, Social Bonds focus to target underserved or underprivileged sectors enabling social good usually with a focus on affordable housing, education, vocational training and micro funding. Sustainability/ESG bonds target both social and climate themes. The first sustainable bond (Green Bond) was launched in 2007 by European Investment Bank and today is the largest segment among all the sustainable bonds.

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Green Bonds

European Investment Bank issued the world’s first Green Bond, called a Climate Awareness Bond (CAB) in 2007. It has issued over € 23.5 billion Green Bonds across 11 currencies. Green bonds prime target projects in climate mitigation involved in the reduction of carbon footprints, and climate adaption (increase adoption of renewable energy) (SDG 7). Both these themes help in aligning to the Paris agreement of keeping global warming less than 2°C. Clean energy remains the largest segment.  Other themes include clean water and sanitation (SDG6), affordable and clean energy (SDG7), buildings and transport (SDG9), city infrastructure (SDG11) and sector followed by low carbon buildings and transport.  Sustainable industry, innovation and infrastructure remains the next key SDG goal addressed by green bonds. As green bond market develops, more thematic bonds overlapping various SDGs will play a larger role in development sector incl.  agriculture (SDG15) and e-mobility.


Social Bonds enable the development and implementation of new and existing projects with positive social outcomes. Adhering to the Social Bond Principles for transparency and accountability, the proceeds from these bonds are directed towards populations facing disadvantages, such as individuals with disabilities, marginalized communities, and those with limited access to education. Since their launch in 2013, Social Bonds have grown 28 times by 2018, driven by the establishment of the Social Bond Principles, a global framework for issuing these bonds supported by ICMA. In 2021, the social bond issuance reached $205.185 billion, according to Environmental Finance. Notably, the first social bond, “Banking on Women,” was introduced by IFC, followed by “Inclusive Business,” although both did not strictly adhere to the Social Bond Principles (Social Bonds, Impact Invest Lab). While Social Bonds align with socially responsible investing principles, it’s essential to acknowledge that the largest investors are still primarily driven by financial gain. On the other hand, Sustainability/ESG Bonds focus on implementing positive social and environmental impacts. The proceeds from these bonds finance a combination of green and social projects, typically adhering to the standards set out by green and social bond principles. Social Impact Bonds, despite the misnomer “bond” due to their lack of coupon or interest payments and limited capital protection, promote the pay-for-success model for delivering measurable and sustainable social impact. It’s worth noting that financial innovation has led to impact bonds offering capital protection today. To learn more about Impact Bonds, consider exploring The middle Road’s online course. Operating as quasi-equity and derivative-like instruments, Social Impact Bonds base payments on predetermined outcomes and involve multiple actors in their implementation. In developing countries, these social impact instruments are evolving into public-private partnerships through development impact bonds, with governments serving as outcome payers.

Sustainable Finance
Fig: The middle Road

Social Impact Bonds, works to bring in accountability in terms of measuring benchmarks or keep performance indicators against the mission of projects to reward philanthropists or private donors. The project exceeded the targets with 160 percent of the final learning target achieved and 116 percent of the final enrolment target achieved.

Educate Girls implemented the first development impact bond in India. 

# Reforms and The Way Ahead

Sustainable Finance/ Sustainable Investing/ ESG has started on a promising note.

But we need to take any good news with a pinch of salt.

Sustainable Finance

An article recently featured in the Stanford Social Innovation Review delves into the authenticity of market returns for social entrepreneurs (SSIR: Marginalized Return). It emphasizes that profits should not be mistaken for social innovation and impact. Despite this, numerous firms are leaving a lasting impact in underserved markets and driving sustained social change. The Organization for Economic Co-operation and Development (OECD) has raised concerns regarding the objectives of impact investors, particularly in emerging markets (OECD, Social Impact Investment). While Social Impact Bonds (SIBs) show promise, they come with legal and other expenses that can make implementation costly for non-scalable options. Although the idea of a Social Stock Exchange is enticing, its mainstream adoption presents challenges.

Firstly, it necessitates buy-in from multiple actors, including investment banks, to enable liquidity. Secondly, for the system to thrive, social startup ecosystems and regulatory frameworks must be established by the government before other market participants step in. As social enterprises might not deliver superior financial returns in their early stages, a market-driven approach alone may not suffice to kick-start them. The United States, being the world’s largest capital market, may encounter challenges due to divergent political views within the social ecosystem. On the other hand, while the European Union appears promising, achieving consensus among its economies may require time. Considering these complexities, a potential solution could be a global consortium with various actors, especially multilateral institutions, acting as a powerful catalyst for fostering a global stock exchange dedicated to social impact.


References (Sustainable Finance/Sustainable Investing/ESG)

  1. Global Sustainable Investment Alliance
  2. Green Securitization Climate Bonds
  3. SIFMA 2019 Outlook
  4. What is relationship between SROI and IRIS
  5. Environmental Finance Sustainable Bonds Insight 2021
Social Bonds: Impact Invest Lab
Better Business, Better World Report, The Business & Sustainable Development Financing, 2014
Maximising the impact of partnership for SDGs
Who Cares Wins
Carbon Pricing Kenneth Gillingham
The Global Climate Risk Report 2020
UN articles
Social Bonds 2018 Impact Invest Lab
Social Bonds IFC
Akshaya Patra
$. UNICEF Financial and Economic Impacts of the Swachh Bharat Mission in India
KPMG ESG takes centre stage
Special edition: progress towards the Sustainable Development Goals
#Green, Social & Sustainability Bonds, a high-level mapping to the sustainable development goals
Masala bonds Aviral Agarwal and Darshan Jain
Beyond ODA flows: definition and research framework
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