The AFD’s new framework aligns with the UN Sustainable Development Goals and the 2030 Agenda.

By Paul A. Davies, Michael D. Green, Edward R. Kempson, and Roberto L. Reyes Gaskin

The Agence Française de Développement (AFD) has issued a new Sustainable Development Bond Framework (the Framework) that establishes bond eligibility criteria based on fundamental principles, and describes the identification and selection process for parties to be included in any Sustainable Development Goals (SDG) bonds. The Framework defines SDG bonds as “loans extended to countries, territorial authorities, NGOs, banks and financial intermediaries, or public and private enterprises” which satisfy the eligibility criteria discussed below. The AFD is a public financial institution working to fight poverty, promote sustainable development, and implement policy defined by the French government.

The launch of the new Framework comes in the context of a rapidly growing ESG bond market. For example, total green bond issuance recently topped US$1 trillion and analysts expect a similar upwards trend in 2021.


Climate has long been a key focus area for AFD, a recurrent issuer of climate bonds since 2014, and the first French entity to issue such bonds. Further, AFD’s Strategic Orientation Plan IV for 2018-2022 is designed to be 100% focused on alignment with the Paris Agreement.

In 2017, the AFD launched the Climate Bond Framework, a separate initiative with climate and environmental benefits. AFD now seeks to update its Climate Bond Framework and “respond to investors requests for sustainable investment, transparency, consistency, and impact reporting”. The CEO of AFD noted that the continued commitment to improve impact investing products demonstrates “how public development banks have been at the forefront of the green and sustainable bond market, by addressing investors’ request for positive impacts for people and for planet, contributing to reach SDGs”.

In the context of the COVID-19 pandemic, AFD’s initiative represents part of a wider trend of increased focus on social matters and sustainable objectives, thus widening the scope of SDG issues beyond environmental topics. The SDG bonds to be issued under the Framework can be characterised as “Use of Proceeds Bonds” under the Green, Sustainability and Social Bond Principles developed by the International Capital Markets Association (ICMA).The bonds will be issued by AFD, repaid with the general cash resources of AFD, and investors will retain full recourse to AFD. Net proceeds raised by the SDG bonds will be allocated to an eligible loan within one year of the issue date (and may be invested in cash, cash equivalents, and socially responsible investment funds on a best efforts basis pending allocation).

The Framework

AFD expects to issue climate, social, and sustainable bonds under the Framework. The proceeds of such bonds will be used in their entirety to make available eligible loans, with eligibility depending on the characterisation of the relevant bond issued.

Under the Framework, a loan is eligible for inclusion in an SDG bond if it complies with all the following requirements:

  • Makes an SDG contribution
  • Complies with at least one of the three technical eligibility criteria
  • Complies with sector-specific diligence requirements
  • Has neutral or positive grades in all of the six dimensions in the sustainable development analysis

SDG Contribution

At the initial stage, discussions will take place between the AFD’s project team and the Sustainable Development (SD) Opinion team. This discussion will centre around how the loan in question contributes to at least one SDG.

At the next stage, the project appraisal stage, the project team will pay particular attention to the six SD dimensions, namely:

  • Sustainable growth and resilient economy
  • Social well-being and reduction of social imbalances
  • Gender equality
  • Biodiversity conservation management of environments and natural resources
  • Fight against climate change and its impacts
  • Sustainability of project impacts and governance framework

Only loans that receive a neutral or positive grade in all six SD dimensions would be eligible under the Framework. In AFD’s view, this feature of the Framework differentiates it from other bond frameworks that use SDG references as a label, without “a clear demonstration of the contribution of the issuer towards SDG’s achievement”. By contrast, the Framework adopts “an impact by design” approach that selects a loan according to its actual contribution, by virtue of the six SD dimensions.

Lastly, the loan should also address one of the eligible categories of the Social Bond Principles and the Sustainability Bond Guidelines of the ICMA. These guidelines are voluntary process frameworks that are recognised as the leading guidelines for the issuance of green bonds, social bonds, and sustainability bonds. The guidelines are designed to drive transparency, disclosure, and reporting. Vigeo Eiris, a rating and research agency focusing on sustainability credentials, independently confirmed that the Framework is indeed aligned with the core components of the above mentioned guidelines.

Technical Eligibility Criteria

To qualify under the Framework, a loan must also comply with at least one eligibility criteria:

  • Theme-based eligibility: The nature or purpose of the activities or projects funded by loans qualifying under this section should fall under one of the specified categories in the Framework, such as energy, social, or technological projects.
  • Climate performance eligibility: Loans seeking to mitigate adverse effects on climate change should demonstrate a project’s minimal climate performance level or contribution to climate change adaptation.
  • Transformation eligibility: Loans that take a results-based approach are conditioned on achieving SD results (i.e. either the margin or other financial parameters vary depending on performance of certain SD results, or the disbursement of the loan is conditional to reaching certain SD results).


As a final step in the approval process, the AFD’s Risk Department conducts due diligence to evaluate the key stakeholders.

The Framework contains a relatively long “general exclusion” list dealing with issues such as production/sale of illegal products or unlawful activity, and products or activities that use forced labour or child labour. Any loans related to those activities on the exclusion list will be rejected outright. Moreover, the Framework also requires specific diligence based on the relevant sector. For example, the Framework includes details on areas such as agriculture, mines, and dams.

The last step in the diligence process is diligence pertaining to human rights and terrorism.

Continued Reporting

AFD plans to publish annual reports on the SDG bonds until the bonds mature. The reports will detail allocation of the proceeds raised as well as environmental and social impact indicators. The reports will also be audited annually by an external auditor selected by AFD. Given that, at the moment, there is growing concern about the lack of standards in the market and incomplete ESG disclosure, AFD’s continued and comprehensive reporting framework will provide much-needed clarity.

Latham & Watkins will continue to monitor developments in this area.

This post was written with the assistance of Sabina Aionesei in the London office of Latham & Watkins.