Gender equality “orange bonds” have seen an increase in interest from issuers in Asia Pacific, but these labelled bonds must work through a series of challenges before more can be issued.
At the forefront of the orange bond movement, which aligns with one of the UN’s sustainable development goals, is Singapore-based Impact Investment Exchange. IIX advises on and structures deals related to sustainability and impact investing with a focus on women's empowerment, community resilience and climate action.
The company also runs a platform connecting investors with impact enterprises that often struggle to obtain funds elsewhere.
While IIX has made strides in the market, selling three orange bonds to raise a total of US$210m so far, the borrower’s latest new issue ran into a surprise hurdle. One of the longstanding partners of its women’s catalyst fund, which provides first-loss protection for the bonds, paused its investments because of a change in leadership.
IIX was forced to delay the deal by months, ultimately launching the bond in July with the support of the International Finance Corp and the Swedish International Development Cooperation Agency.
IIX’s WLB 7 came to market with a US$60m first tranche, comprising a US$52.8m 5.88% four-year senior part and a US$7.2m four-year subordinated portion. A second tranche of similar size is due to price by the end of the year. According to the prospectus, the IFC had preliminary approval to invest in up to US$13.5m of the senior bonds, but the final size of its investment was not disclosed. The IFC did not respond to questions from IFR.
The IFC provided a loan to the investor in the subordinated tranche and Sida provided a guarantee to the issuer for up to 40% of principal losses from loans in the portfolio. Australian philanthropic organisation Minderoo Foundation provided US$2.6m in catalytic first-loss capital.
The proceeds of the bonds were used to make loans to institutions focused on microfinance, SME lending, and sustainable agriculture, clean energy and water lending in India, the Philippines, Indonesia and Sri Lanka. Over 773,000 female beneficiaries will be directly and indirectly impacted by the loans, according to IIX.
Despite the disruption, IIX believes traction for orange bonds is picking up in Asia and more deals could be seen this year.
Going mainstream
IIX, which priced the world’s first orange bond in 2022, has raised over US$288m through its Women’s Livelihood Bonds programme, channelling capital to women-focused enterprises in Asia's emerging market economies. The total includes orange bonds issued by IIX and other bonds it had issued before launching its orange framework but whose proceeds were mostly used to disburse loans to women-led businesses.
While early deals were rooted in markets like Indonesia and Sri Lanka, recent conversations include Japan and Australia – unlikely venues for what began as an emerging market instrument.
IIX said on Wednesday it had provided a second-party opinion to Japanese trading company Itochu's orange bond framework – a first in Japan.
Specifically, IIX said the framework aligns with its three orange bond principles, which are gender-positive capital allocation, diversity in leadership and transparency in investment processes and reporting.
“There generally has been a push for greater gender equality in the country from a government level,” said George Stopczynski, IIX’s vice-president of innovative finance.
The orange bond market remains tiny, dwarfed by green and sustainable debt. This is in part a labelling issue as many large issuers, like South Korean banks, use the term gender bonds instead, and generic social bonds, or even unlabelled bonds, can also have a gender focus. For instance, India's Aditya Birla Housing Finance in January placed an Rs8.3bn (US$96m) unlabelled five-year bond with IFC that will support in part home ownership among women and women-led micro, small and medium enterprises.
Orange bonds issued by IIX have a clear mandate to address a funding gap, as women-focused enterprises, especially in emerging Asia, often face higher borrowing costs and less access to capital.
Labelling, in Stopczynski’s view, offers a transparent and standards-based way to channel funds to them at scale.
“It also works as a stamp of quality for investors and enables at least some form of comparison,” he said.
But these bonds, being unrated, are limited to a small group of buyers. As its beneficiary countries are mostly high-risk markets, IIX has had to rely on credit protection through a guarantee and a first-loss mechanism.
It is also why support from global institutions – and their sudden exits – are so pivotal. Without such backing, deals can take a long time to complete or never see the light of day.
Pipeline dreams
For its next WLB issue, the company is aiming for a larger size, though it has not set a specific target.
“Our long-term aim is to have the WLB Series bonds at benchmark size,” said Stopczynski.
Benchmark size is generally understood to be US$300m to US$500m in Asia's bond market.
The firm has also made headway in Indonesia, helping state-owned microfinance lender Permodalan Nasional Madani become the first in the country to issue both an orange bond and orange sukuk, raising Rp2.75trn (US$170m) in July.
The programme’s success has encouraged the issuer to target the raising of nearly US$1bn worth of orange debt in Indonesia in the next two years.
IIX is also working with Indonesian regulator Otoritas Jasa Keuangan to help the country integrate labels into its sustainable bonds. It is collaborating with Indonesia’s finance ministry to integrate the orange framework into the latter’s sustainable bond framework.
Elsewhere, IIX announced on Tuesday that it had launched a feasibility study for a pilot scheme to guarantee orange bonds in Australia. The facility will provide a guarantee of A$15m (US$9.7m) to unlock A$35m in lending from financial institutions to enterprises that create measurable inclusion and climate outcomes.
This will allow banks to offer lower borrowing rates to women-owned, women-led and women-impacting micro, small and medium enterprises which often face barriers to finance, including higher borrowing costs.
There are also plans to help issuers in Vietnam print orange bonds, though no details were provided as talks are underway.
But the goal is not to scale up too quickly, said Stopczynski. IIX’s goal remains to mobilise capital to build an ecosystem that can benefit underserved communities.
“We want to see women represented across energy transition bonds, infrastructure bonds, green and climate bonds across different emerging markets to create more holistically impactful and sustainable issuances,” he said.