The United Nations’ sustainable development goals provide an ambitious blueprint for addressing global economic, environmental, social and governance challenges by 2030. Yet, traditional sources of finance are insufficient to close the SDG financing gap, estimated at between $2.5tn and $4tn annually. Closing this gap requires the exploration of bold but necessary financing solutions.

Among these, bonds have emerged as a promising blended finance instrument to attract both public and private sector investment in projects that contribute to the SDGs, particularly in developing countries. As debt instruments, use-of-proceeds bonds are one element in supporting the financing of the global sustainability agenda and come in a variety of forms, including green bonds, social bonds and sustainability-linked bonds. Each of these bonds is designed to finance specific SDG-related projects.

When used as part of a blended finance strategy, these bonds offer several advantages, such as attracting private capital by reducing risk. One of the main challenges in financing SDG-related projects is the perception of high risk. Many development projects, particularly in emerging and frontier markets, carry significant financial, environmental and social risks. Bonds, when combined with concessional financing or guarantees, can help mitigate these risks and make them more attractive to private investors.

Blended finance structures often involve the use of concessional capital to absorb some of the risk, thereby encouraging private investor participation. By de-risking investments, bonds can unlock significant private sector resources that might otherwise remain untapped due to concerns about returns or stability.

Scalability and long-term investment

Bonds are well suited for large-scale investments, especially those needed to achieve the SDGs. These instruments are issued in large volumes, allowing for significant capital mobilisation. Unlike smaller-scale financing options, bonds can raise billions of dollars, providing the scale needed for large infrastructure projects that are critical to achieving the SDGs.

In addition, bonds are typically long-term financial instruments, with maturities ranging from a few years to several decades. This aligns perfectly with the long-term nature of SDG-related projects. By providing a steady and predictable source of capital, bonds attract institutional investors, who tend to have a longer horizon.

Diversifying sources of financing

One of the standout advantages of bonds in blended finance is their ability to diversify funding sources. In traditional financing models, projects often rely on a single source of capital. However, bonds can tap into global capital markets, reducing reliance on public funding and ensuring broader investor participation.

Sustainable bonds have gained traction as investors increasingly seek opportunities that align with ESG principles. By making SDG-focused projects more accessible to a wide range of investors, bonds help catalyse the flow of private capital into sustainable development and attract a growing base of institutional investors eager to contribute to projects with a tangible positive impact.

Predictability and transparency

For investors, bonds provide a high level of predictability and transparency, which are critical for financing large-scale SDG projects. They also provide fixed interest payments, which give investors a clear understanding of returns, while regulatory frameworks such as the International Capital Market Association principles, provide investors with greater assurance on how funds are being used. Standardised bond issuance processes and reporting requirements also enable investors to measure the impact of their investments and clearly communicate to stakeholders, which in turn builds confidence in the investment vehicle.

Focus on sustainability and impact

The growing demand for impact investing has led to the rise of specialised use-of-proceeds bonds, designed to combine financial returns with measurable environmental and social impact. These type of bonds not only drive capital for projects that align with sustainable development objectives, they also embed impact measurement frameworks, making them particularly attractive to investors seeking both profit and purpose. Impact measurement tools are often built into bond structures, adding credibility and ensuring that investors can track the outcome of their investments.

The global reach of specialised bonds cannot be overstated; they are issued in global financial markets, providing an opportunity to attract capital from investors around the world. This international reach is critical for financing SDG projects in developing countries, where domestic financing capacity is often limited. By tapping international bond markets, blended finance instruments can mobilise significant cross-border investment flows, which are essential for scaling up SDG interventions globally.

With continued innovation in financial markets and growing recognition of the need for sustainable investment, bonds will continue to play a central role in supporting the financing of the SDGs. Stronger regulatory frameworks, clearer standards for measuring impact and greater collaboration between the public and private sectors will be critical to unlocking the full potential of bonds in supporting the SDGs.