Digital impact bonds could broaden sustainable finance
Digital bonds could play a greater role in financing verified impact and help to close the US$6trn per year annual climate and nature finance gap, according to the Green Digital Finance Alliance.
"Digital impact bonds" combine digital ESG-labelled or thematic bonds with measurement, reporting, and verification systems that could allow investors to see allocation and impact data in real time, according to the GDFA.
Using existing market standards and principles for ESG-labelled bonds, digital impact bonds could reduce the costs of issuance and data measurement, reporting, and verification, which would allow more smaller issuers and issuers from the Global South to access the market and raise sustainable finance.
"At a time when overall sustainable finance is under pressure, it is becomes even more critical that whatever is being invested or financed is targeted with much higher precision using a more data-driven approach," said Gerrit Sindermann, executive director of the GDFA.
"We are aiming to build on existing standards and principles, leveraging technical innovation to validate certain impact use cases such as for renewable energy finance or ecosystem conservation."
GDFA is a non-profit foundation that was launched in 2017 by the United Nations Environment Programme and Ant Group, an affiliate company of China's Alibaba group.
Digital impact bonds are typically tokenised or smart-contract based ESG-labelled bonds in all categories – green, social, sustainability and sustainability-linked – that can show verifiable positive impact by directly integrating dMRV systems.
Green digital bonds are perhaps the most well-known example, although relatively few have been issued to date. Many banks have been running digital bond pilots but their efforts remain fragmented and unaligned.
"Tokenised bonds have been plentifully tested. ESG-labelled bonds in digital versions have been fewer still, but they are a strong use case for this emerging tokenisation trend in capital markets," Sindermann said.
"The call to action is for conventional players to join our initiative to actually leverage this new instrument that they are already working on for sustainable finance."
Hong Kong is pushing ahead and issued its third annual digital green bond offering last week. Hong Kong Special Administrative Region's latest US$1.3bn-equivalent four-tranche multicurrency green transaction is part of a series of initiatives aimed at building out digital assets in Hong Kong after issuing the world's first tokenised bonds in 2023.
The Hong Kong Monetary Authority presented a five-year blueprint at the Hong Kong Fin Tech Week on November 3 to develop the city's fintech industry, with the tokenisation of real-world assets as one of the pillars.
Other issuers have also been working since 2023 to connect the dots between digital ESG bonds and impact. The European Investment Bank issued a digital green bond in June 2023 on a platform with energy consumption comparable to non-blockchain systems and with proceeds allocated to green projects, after first issuing digital bonds in 2021.
ABN AMRO issued digital green bonds in September 2023 to refinance green assets and Hitachi issued a 10bn yen digital green bond offering in December 2023 with proceeds used for energy efficient construction and renovation that allowed investors to monitor environmental impacts and energy efficiency gains of financed projects in real time.
Various companies are springing up to verify and supply verified impact dMRV services, such as London-based ClimateAligned, which has an AI platform that is designed to integrate sustainability, ESG and climate factors and data.
Jurisdictions that can offer legal clarity and sandbox regimes, such as Switzerland, Singapore and Hong Kong are moving faster, although interest is also high in the Middle East.
In July, First Abu Dhabi Bank issued the MENA region's first digital bond to be listed on Abu Dhabi Securities Exchange via HSBC's Orion platform. ESG-labelled digital bonds are expected to be issued from the region in coming months.
Greater liquidity, regulatory clarity and integrating robust dMRV systems is also expected to drive further issuance globally.
"I believe that from a digital perspective, there really is applicability for sustainable finance," a banker based in the Middle East said.