Republic of Benin’s trailblazing €500m 12,5-Y inaugural issuance under its new SDG Bond Framework

11-minute read

On July 15th, 2021 Benin successfully launched its inaugural Sustainable Development Goals Bond (“SDG Bond € 500 million 12.5 years”). It represents a landmark transaction in the emerging market space as this was the first SDG issuance from an African sovereign. Natixis acted as Joint Sustainability Structuring Adviser of the SDG Framework[1] and Joint Bookrunner on the inaugural transaction.

Transaction highlights

To take advantage of a favorable market window and get ahead of any competitive supply, the issuer announced the EUR SDG mandate on Monday July 12th. The series of virtual meetings involved more than 60 European and US investors. The issuance was launched on the 15th of July 2021 with a size being set at 500 million and the final yield of 5.25%. The orderbook peaked above 1.2 billion euros.

The Benin’s issuance opened a new page in the history of the Sustainable finance / SDG finance in Africa and represents a key milestone for the issuer in the primary capital markets:

• Pricing of new notes inside existing EUR curve (with an estimated greenium of 20 bps)
• Broadening and diversification of issuer’s investor base

This inaugural € 500 million 12.5-year transaction (maturing on the 22nd of January 2035), was issued at a coupon rate of 4.95%. A significant share of the bond (~91%) was allocated to investors with sustainable investment strategies (i.e. incorporating ESG criteria in their investments) according to Natixis’ proprietary methodology[2].

Format and Second Party Opinion

From a format standpoint, it is an ICMA Sustainability Bond. The Framework is aligned with the most recent Sustainability Bond Guidelines (2021 edition). The contribution to sustainability has been assessed as “advanced” by Moody’s VE, therefore obtaining the highest possible score and matching market “best practices”. Expected impacts are deemed “advanced” and ESG risks management “robust”[3] by the SPO provider.

SDG features of the Bond/Program

On top of ticking sustainable finance best practices, Benin’s Framework displays additional features that enable to designate it as an “SDG Bond”. Bear in mind there is no canonical definition of what an SDG Bond means. There is a vast array of SDG finance practices, some remaining superficial or unsophisticated. It a rule of thumb from market participants.

That being said, the 2030 Agenda and the SDGs embed key characteristics, notably in terms of multi-stakeholders governance, context-based analysis reflecting national situations and priorities, efforts to prioritize the most enabling and pressing targets, long-term planning and public policies consistency enhancement, attention paid to vulnerable population as well as positive and negative interlinkages effects. The 2030 Agenda also relies on an ecosystem of public official statistics, cooperation with international organizations and donors, and of course, accountability mechanisms with events like the High-level Political Forum for Sustainable Development, which is the United Nations forum for the global follow-up of the implementation of the 2030 Agenda. When a Bond Program mirror or incorporate such characteristics, it can legitimately be called an SDG Bond.

7 features deserve to be highlighted regarding Benin’s SDG Bond Framework:

1. Based on the prioritization of the most pressing SDG targets and on an analysis of the total cost to achieve them carried with international organizations;
2. Sophisticated process to evaluate and select expenditures based on their "SDG sensitivity";
3. The eligibility of different nature of expenses with a string of conditions;
4. A total of 12 overarching eligible categories enriched with rationale clarifying the context of intervention and reasoning behind the criteria and expense perimeter;
5. Granular target populations thoroughly defined and bespoke to Benin’s context;
6. A comprehensive list of theme-based and sectoral exclusions with a particular focus on conservation of biodiversity;
7. The first of this kind partnership with the Sustainable Development Solutions Network (SDSN) creating a unique feedback-loop and content to feed impact reporting;

We thereafter propose to dig into each of them.

1. Based on the prioritization of the most pressing SDG targets (49 ones identified) and on an analysis of the total cost to achieve them carried with the IMF, the UNDP, and the German cooperation (GIZ)[4]. The SDG costing methodology used by Benin includes 3 main steps;

         i. Identifying bottlenecks in the way of achieving the SDGs (particularly those SDGs whose achievement would have major contribution           to other goals);

        ii. Identifying accelerators that can eliminate bottlenecks;

       iii. Evaluating the cost of implementing these actions.

For the period 2021-2025, the cost of accelerating measures for achieving the SDGs has been assessed at 18 billion euros. Around 40% of this total amount is to be covered exclusively by the national budget, highlighting the need to attract private capital and maximize multilateral funding. Through the cutting-edge transparency provided through this SDG Bond Framework, one expects an indirect multiplier /leverage effect with increased blended finance flows and private investments.

2. Sophisticated process to evaluate and select expenditures based on their SDG sensitivity. Such process is anchored into a thorough screening of budget lines to assess their actual contribution to SDG gaps narrowing. In addition to detailed eligibility criteria (see infra), expenses will be sorted out based on various lenses, among which:

            i. Falling into the classification of “priority social spending” defined jointly with the IMF[5]

           ii. Their SDG coloration index (according to a sensitivity analysis of all Ministries’ individual annual work plans, based on criteria                         related to effectiveness, interrelationships, respect of the “no one left behind principle”, geographical impacts).

3. The eligibility of different nature of expenses with a string of conditions:  in the context of emerging countries, public services are engines of social and economic betterment. Public administrations are key enablers of such public services and incur operating and personal expenses. Therefore, making eligible only CAPEX/infrastructures expenses would be biased and too narrow, ignoring the reality of SDG advancement. However, in Benin Framework, the decision has been made to circumvent the eligibility of operating and personnel expenses to the epitome of welfare government: education and health. Solely personnel costs for teachers and doctors, midwives and state nurses are eligible, as well as operating costs for the Ministries of Health and Education (maintenance, office supplies and equipment’s). Meanwhile, public investment expenditures are eligible when falling into the categories of eligible expenditures (e.g. expenses devoted to infrastructures, building schools, hospitals, water, and low-carbon electricity supply networks, zero emission transportation and ICT infrastructures). Current transfers and subsidy expenditures are also eligible (scholarships fees, payment for care of the indigent using emergency funds, support to school, etc.)

4. A total of 12 overarching eligible categories enriched with individual rationale clarifying the context of intervention and reasoning behind the criteria and expense perimeter. Rationale rely on literature about development economics and sustainable finance in emerging countries, social or environmental standards (World Bank standards, United Nations Development Programme). The commitment of the Republic to the preservation and enhancement of its architectural and natural heritage treasures (e.g. rehabilitation of the historic city of Abomey, preservation of the sacred forest of Kpassè Zoun in Ouidah) is noticeable since no African state had previously linked heritage preservation and education in his external financing programme.

The eligible expenditures are classified according to the four pillars of Benin's national development plans: population, prosperity, planet and partnerships. 

The four pillars  (4P) of the 2018 – 2025 National Development Plan and the corresponding SDGs

Pillar #1: Population

Pillar #2: Prosperity

Pillar #3: Planet

Pillar #4: Partnerships

5. Granular target populations thoroughly defined. The end-beneficiaries of eligible expenses are bespoke to Benin's context (see the table below).

6. A comprehensive list of theme-based and sectoral exclusions with a particular focus on conservation of biodiversity.  The Framework encompasses a set of stringent exclusions criteria. The exclusion of any project involving the deforestation of primary forests, modified natural forests or mangroves is notable. Fossil fuels in all their forms are excluded (solid, liquid, gaseous). Red meat sector relates activities are excluded. In some instances, exclusion policies are more demanding than development finance institutions’ requirements (e.g. population displacement).

7. The first of this kind partnership with the Sustainable Development Solutions Network (SDSN) creating a unique feedback-loop and feeding impact reporting. This collaboration with the SDSN chaired by Pr. Jeffrey Sachs is a first in sub-Saharan Africa[11]. The SDSN will conduct an evaluation of Benin’s situation vis-à-vis the SDGs, the progress made and trends in filling SDG gaps. It will provide the Government of Benin with an in-depth analysis of the country’s comparative SDG performance with peers, to compare this performance with the country's public policies and ambitions and aims to support its efforts to incorporate the SDGs into Benin’s budgetary and fiscal framework. Such input will create a feedback loop to take stock of progress and adjust the selection of eligible expenses on an ongoing basis. The SDSN's observations will guide Benin's SDG Bond Steering Committee in adjusting/reweighting Use-of-Proceeds selection to maximize impacts. The independent and authoritative assessment of Benin’s efforts will feed impact reporting and be shared with investors. Finally, a comprehensive sample of outcome and impact indicators is provided as well as a list of international and institutional cooperation initiatives in statistics.

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For Natixis, the structuring of this SDG Bond Framework and this inaugural issuance are a new SDG credential following similar roles played with the Mexican Government (Mexico’s € 750m 7-year inaugural SDG Bond met strong investors’ appetite) and the Group AFD (Success of AFD Group’s €2bn inaugural issuance under its new SDG Bond Framework). We also launched an equity Index on the SDG 6 and 14 (Natixis’ Euronext Water & Ocean Europe 40 Index).

Since the release of a flagship report titled “Solving Sustainable Development Goals Rubik’s Cube”  in 2018, Natixis Green & Sustainable Hub has been very active in this SDG space, and so through various channels: publications, transactions, product creation, but also dialogue with different stakeholders, including the participation in workshops on the French 2030 Agenda Roadmap Elaboration. Recently, Natixis Green & Sustainable Hub has been selected as a technical advisor to accompagny the International Development Finance Club (IDFC) on the operationalization of the SDG and the so-called SDG Finance Alignment. 

To go further:

• Republic of Benin SDG Bond Framework – available here.
• Press release of the partnership between the Republic of Benin and SDSN – available here.
• Vigeo Eiris Second Party Opinion – available here.