The world’s first outcomes-driven gender bond

In early September, IDB Invest structured and subscribed a gender-focused social bond issue for Colombia’s second largest bank, Banco Davivienda. The deal, worth $100 million, or COP362,500 million, has a seven-year maturity; but perhaps most importantly, it represents the world's first issue of a gender-linked bond based on achieving outcomes.

“Globally we’re seeing a trend of social bonds focused on advancing gender equality and that is [now] arriving in emerging markets, including Latin America and the Caribbean,” says Gema Sacristan, IDB Invest’s chief investment officer. “It’s the first time a gender bond provides financial incentives, which reduce the issuer’s cost of financing, for meeting specific outcomes focused on supporting women-led SMEs – going beyond the projected commitment of the issuer.”

Davivienda will use the proceeds, acquired in full by IDB Invest, to finance the growth of its women-led SMEs portfolio (WSMEs), as well as for the purchase of social housing by women in Colombia. “We bought [the bond] with the intention of generating interest from investors as well as issuers,” says Sacristan, explaining the lack of any private investment in the issuance.

As part of the issuance process, IDB Invest advised Davivienda on the design of the methodological framework for the use of proceeds – involving criteria for the selection, monitoring and evaluation of projects—which was aligned with the Social Bond Principles of the International Association of Capital Markets (ICMA). Davivienda also secured an independent verification of the methodological framework, known as a second-party opinion, from Vigeo Eiris, a global provider of ESG research, data and assessments.

The Colombian bank will publish an annual report accounting for the distribution of the resources. IDB Invest will monitor the progress annually, and a third party will audit the disbursement to make sure the resources are being allocated to the beneficiaries. There are over 30 key performance indicators to monitor the overall allocation of the funds.

This is the first deal in Colombia under the Women Entrepreneurs Financing Initiative (We-Fi), an international alliance that aims to unlock financing and access to markets for companies led by women. Through the We-Fi programme, IDB Invest will grant Davivienda a $300,000 bonus over a five-year period as certain outcomes are achieved, in this case the expansion of the bank’s WSMEs loan portfolio from 20% to 27% (approximately 6,500 loans). The bonus will be disbursed annually in amounts of $60,000, following the progress assessments.

IDB Invest, which has $12 billion of assets under management, will also provide advisory services with funds from the We-Fi programme to support Davivienda in designing a value-and-positioning proposal, focused on serving the WSMEs segment. The WSMEs are defined as companies owned and managed by women with annual sales of up to $5.2 million.

Around 35% of entrepreneurs in Colombia are women, according to the Asociacion Colombiana de Emprendedores. However, according to the World Bank’s MSME Finance Gap Report, women-led SMEs face a financial gap of $4.8 billion. “When we look at the housing loans market, a recent study by the IFC shows that the estimated size for the women housing loans market in Colombia is $23 billion, but this demand remains constrained by unstable income and difficulties to fulfill approval requirements,” says Sacristan.

Issues coming to market

Negotiations were far from plain sailing, however. IDB Invest encountered a number of challenges during the structuring of the bond, not least the onset of Covid-19 pandemic. Says Sacristán: “For the banking sector, the pandemic has meant a reassessing of their financial sustainability while still trying to address the many needs of their clients, both in the personal banking and corporate segments.”

Another issue was to convince the Colombian bank to agree to a key performance indicator specifically for the growth of their WSME portfolio in the face of such adverse macroeconomic conditions. “Also, they accepted two demanding eligibility criteria: that the SMEs had to be owned and managed by women. Most gender bond issuers focus on the SMEs being managed by women but not necessarily being owned by them,” adds Sacristan.

Davivienda’s gender bond was only the second ever issued in Latin America. The first, for $50 million, was issued by the Panama-based bank Banistmo. The proceeds also targeted WSMEs, contributing to Banistmo’s Impulsa programme, which combined financial products and training into packages specifically tailored for their women-entrepreneur clients.

But just a few days ago, FIRA, a group of Mexican public trust funds focused on agricultural and fishing development, issued a Mex$3 billion ($142 million) gender bond in the country’s BIVA stock market. IDB Invest’s public sector counterpart provided technical assistance for the bond’s framework.

And looking forward, there may be more to come. By the end of the year, IDB Invest will be structuring and investing in two more gender bonds, another one in Colombia and one in Peru; and during 2021, the group will be supporting a further two issuances, in Brazil and the Dominican Republic.

“After Banistmo and Davivienda’s bonds, we are seeing new issuers in the region,” says Sacristan. “There are more and more companies and banks that see an opportunity to link their gender equality strategies with capital market opportunities.”