(Co-authored with Lekha Chakraborty)
In 2015, at the time of adoption of Sustainable Development Goals (SDGs), it was estimated that a total annual investment of USD 3.9 trillion will be required to achieve the goals by 2030.1 The level of investment in key SDG-related sectors was estimated to be USD 1.4 trillion per year, with the remaining USD 2.5 trillion identified as the financing gap. As per the 2024 Sustainable Development Goals Report,2 this financing gap has widened to upwards of USD 4 trillion annually. With the 2030 deadline to achieve the sustainable development goals (SDGs) looming, the multilateral banks (MDBs) have faced a series of setbacks – high sovereign debt levels, overstretched MDB balance sheets, and unenthusiastic private sector participation – that threatens to derail the development financing needs of the developing economies.
The 2025 Financing for Development (FfD)3 outcome document has highlighted the need to address this annual SDG financing gap, and suggests measures to be undertaken to mobilize additional private resources. The Compromiso de Sevilla, forged at the 2025 Financing for Development Conference, charts a bold path to bridge the $4 trillion SDG financing chasm. Leaders pledge to turbocharge domestic taxes, slash remittance costs, triple MDB lending, and overhaul debt frameworks for sustainability. By amplifying ODA, blended finance, and South-South ties, it demands urgent reforms to multilateral institutions—ensuring inclusivity and innovation to lift vulnerable nations toward 2030 prosperity. Among the measures highlighted, the framework urges establishment of adequate risk management systems, deepening of capital markets and promotion of scalable and innovative financing mechanisms. The commitment towards developing innovative financing mechanisms has been highlighted in the previous FfD conferences, and significant emphasis has been given for MDBs to adopt these approaches since the 2015 Addis Ababa Action Agenda.4 The Addis Ababa Action Agenda (2015) charts a transformative blueprint for financing sustainable development, urging a $3.9 trillion annual push to meet the SDGs by 2030. At its core, innovative financing emerges as a game-changer: blending public-private partnerships, leveraging technology transfers, and pioneering instruments like impact bonds to unlock non-traditional funds. By fostering transparent regulations and global cooperation, it empowers MDBs and emerging markets to bridge gaps—ensuring finance isn't just scaled, but smartly aligned with inclusive, resilient growth.
Analysing Innovative Financing
While there is no consensus on its definition, innovative financing includes mechanisms and solutions for raising funds that go beyond the traditional spending approaches by either the official or private sectors. Innovative financing for development encompasses mechanisms that mobilize additional resources or enhance the efficiency of existing financial flows beyond traditional official development assistance (ODA) and standard private investment. These include blended finance, guarantees, syndicated loans, debt conversion instruments, results-based financing, and thematic bonds (e.g., green, blue, vaccine, or SDG-linked bonds). Such approaches typically leverage public or private capital to de-risk investments, thereby crowding in private sector participation, or redirect existing flows toward higher development impact.
Crucially, innovative financing must be distinguished from financing for innovation. The former focuses on reforming the structure and sources of development finance itself, whereas the latter supports research and development, startups, or technology adoption. Innovative financing is agnostic to the end use of funds; its innovation lies in the financial architecture—how resources are raised, allocated, and incentivized. Multilateral development banks (MDBs), in coordination with the IMF under the Cascade approach and the G20 Capital Adequacy Framework review, have scaled these instruments significantly. Recent examples include the IMF’s Resilience and Sustainability Trust, which catalyses private climate finance, and hybrid capital operations that expand MDB lending capacity. Properly designed, innovative financing can help bridge the estimated $3–4 trillion annual SDG financing gap while preserving debt sustainability and additionality.
These mechanisms may combine existing financing instruments or apply existing financing instruments to new contexts (sectors, countries). This is done for the purposes of mobilising additional development funds through new sources or enhancing the effectiveness of development finance by making financial flows less costly and more results-oriented.5 Several approaches have been deployed by the MDBs over the years, as development financing has also evolved to engage with new actors and use innovative financial instruments.
Thematic Bonds
Among these instruments, thematic bonds have come to represent an asset class that is both scalable and aligns the bond proceeds with sustainable development priorities. Also referred to as use-of-proceeds bonds, thematic bonds consist of green, social, sustainable (GSS) and sustainability-linked bonds. The proceeds of these bonds are earmarked for environmental projects (climate adaptation and mitigation, renewable energy, marine conservation), social projects (health, education, and gender equality) or a combination of both (as in case of sustainability bonds).
Thematic bonds (green, blue, social, sustainability, and SDG-linked) are fixed-income instruments whose proceeds are earmarked for projects with specific environmental or social objectives. Issuance by sovereigns, sub-sovereigns, and multilateral institutions has surged, exceeding $1 trillion annually, providing long-term, low-cost funding while signalling policy credibility and attracting ESG investors. Robust frameworks and independent verification remain critical to preserving market integrity
Gender bonds are thematic instruments whose proceeds finance projects advancing women’s empowerment—female entrepreneurship, education, health, and economic inclusion. Issuance by sovereigns, multilaterals (IFC, EBRD, AfDB), and corporates has exceeded $20 billion cumulatively by 2025, following ICMA Social Bond Principles and frameworks such as 2X Challenge (a global initiative launched by G7 and G20 DFIs in 2018 that sets minimum criteria for investments to qualify as meaningfully supporting women through entrepreneurship, leadership, employment, consumption, or indirect reach, with a key benchmark for gender-lens investors use). While they channel private capital toward SDG 5, risks include pinkwashing (unsubstantiated impact claims), inconsistent KPIs (Key Performance Indicators—quantifiable metrics such as number of women-owned SMEs financed, female leadership positions created, or reduction in gender pay gap, often lacking standardization and third-party validation), weak verification, and potential crowding-out of systemic reforms. In emerging markets, higher costs can affect debt sustainability. Robust taxonomies, mandatory independent assurance, and strict additionality are critical to ensure credibility and transformative outcomes.
While resembling some aspects of GSS bonds, proceeds of sustainability-linked bonds (SLBs) are not tied to a specific project, but instead aimed towards achieving pre-determined sustainability performance targets (SPTs). An innovative feature of SLBs is linking the pricing of the instrument to the borrower’s performance in achieving the targets. Thus, incentives may be given to the borrower in the form of a step-down feature (a decrease in the coupon rate of the bond) in case of achievement of targets. The bond may also carry a step-up feature (an increase in the coupon rate of the bond) in case the borrower fails to achieve the target.6
Trends in Issuance of Thematic Bonds
Recent trends suggest a growing interest in thematic bonds, with issuance reaching an all-time high of over USD 1 trillion in 2024.7 Meanwhile, the cumulative issuance of thematic bonds reached USD 5.1 trillion between 2018 and 2024. Of this, emerging market issuers contributed around USD 800 billion, or about 16 percent of the total. The issuance market is also experiencing diversification, with a growing shift away from issuance of green bonds to sustainability bonds, which favours the borrower with increased flexibility in use of proceeds. The evidence also points toward innovation in the structuring of such thematic bonds. For example, Seychelles issued a blue bond in 2018 as part of its effort to reduce its outstanding debt stock through a debt-for-development swap.8 As part of the swap, existing public debt was paid off at a discount, and the savings generated, from the favourable terms on the blue bond and reduced cost of borrowing, was utilised for funding ongoing marine conservation and climate adaptation projects.
Challenges and Way Ahead
Despite the growing interest, the share of thematic bonds in the total fixed income issuance declined from 2.5 percent in 2023 to 2.2 percent in 2024. Several challenges remain to be addressed:
• Despite an uptick during the pandemic, demand for social bonds have remained stable and low in comparison to green bonds. While an increase in demand for sustainable bonds may suggest financing for social projects as well, a lack of result-oriented design for such projects may be leading to limited demand for such bonds. Efforts have been made to include social targets in sustainability-linked bonds, but the performance of such bonds still remains ambiguous.
• Emerging markets in Latin America and Caribbean region have accounted for the majority of issuance of SLBs in the last seven years, and local currency-denominated SLBs have also steadily risen. However, sustainability-linked bond issuance declined by 46 percent year-on-year in 2024. The weak performance may be attributed to weak design of incentives for both the borrowers and investors. As step-up features may be too low, the issuer will be disincentivised to achieve the targets. As a result, the investors will also be deterred from investing in such bonds due to the issuer's lack of credible commitment towards achieving these targets
• Excluding China, issuance of thematic bonds remains denominated mostly in US dollars or Euros. While MDBs have made efforts to increase issuances in local currency of emerging markets and mitigate foreign exchange risks through credit enhancement, uncertainties in the global markets may restrict the capacity of MDBs to provide such enhancements.
As the thematic bond market matures and more countries adopt robust issuance frameworks, investor concerns over impact credibility and transparency will ease somewhat. However, meaningfully scaling private capital inflows demands sharper innovation from issuers and multilateral development banks alike: tying proceeds to projects with clear, quantifiable, and time-bound outcome targets backed by credible commitments; mandating frequent, standardised, and independently verified performance reporting; and accelerating local-currency issuance through enhanced onshore hedging instruments, synthetic currency swaps, and MDB-backed currency risk facilities. Without these decisive steps, thematic bonds will remain a niche instrument rather than the transformative channel needed to close the SDG financing gap. Further, as evidenced by the intention of MDBs to improve local currency financing mechanisms,9 efforts need to be made to increase hedging capabilities and develop country-specific solutions for onshore hedging sources and mechanisms.
[1]Based on the estimates provided in the 2014 World Investment Report by UNCTAD: World Investment Report 2014 https://unctad.org/publication/world-investment-report-2014
[2] UN (2024), Sustainable Development Goals Report: The Sustainable Development Goals Report 2024 https://unstats.un.org/sdgs/report/2024/The-Sustainable-Development-Goals-Report-2024.pdf
[3] Sevilla Commitment Fourth International Conference on Financing for Development https://financing.desa.un.org/sites/default/files/ffd4-documents/2025/Compromiso%20de%20Sevilla%20for%20action%2016%20June.pdf
[4] Addis Ababa Action Agenda https://agendas.world/agendas/addis-ababa-action- agenda/
[5] https://www.un.org/sites/un2.un.org/files/innovative_fincancing_14_march.pdf
[6] Climate Bonds Initiative: Sustainability-Linked Bonds https://www.climatebonds.net/data-insights/publications/sustainability-linked-bonds-building-high-quality-market-2
[7] 2024 IFC-Amundi Report on Emerging Market Green Bonds https://www.ifc.org/content/dam/ifc/doc/2025/emerging-market-green-bonds-2024.pdf
[8] Debt-for-nature Swap: Seychelles | SeyCCAT https://climatefit-heu.eu/wp-content/uploads/2024/07/15_Seychelles-DNS.pdf
[9] From Vision to Impact: Implementing the World Bank Group Evolution https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099032924184513110/bosib11b64b67b0511a66d139b76c4235f6