FTSE Russell Insights

Multilateral Development Bank bonds: a sweet spot in fixed income sustainable investing

Gethana Shashitharen

Senior Analyst - Fixed Income and Multi Asset Index Product

Kim Crawford

Graduate Associate – Fixed Income and Multi Asset Index Product
  • Sovereign bond investors continue to look for sustainable/regulatory aligned solutions.
  • This creates a challenge for fixed income investors looking for rates exposure that also improves environmental and societal well-being, in absence of regulatory clarity 
  • But Multilateral Development Bank (MDB) bond performance seems to meet both goals

Meeting sustainable requirements in government bond allocations 

The emphasis on integrating sustainable investment choices throughout portfolios has triggered the launch of a vast range of products and services which meet environmental, social and governance (ESG) criteria. One exception within sustainable portfolio building blocks is government bonds, where fewer solutions have been brought to market. As a potential solution, Multilateral Development Bank (MDB) Bonds have provided US Treasury-like performance, while delivering sustainability characteristics, as the chart below illustrates.

Figure 1 – Yield to Maturity Comparison of the FTSE MDB Index and the FTSE US Treasury 1-10 Years Bond Index

When comparing yield to maturity, the FTSE World Broad Investment-Grade USD Multilateral Development Bank Bond Capped Index has performed similarly to the FTSE US Treasury 1-10 Years Bond Index over the last decade

Source: FTSE RUSSELL, as of October 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures

The launch of dedicated bond indices within the MDB space, such as the FTSE’s Multilateral Development Bank Bond Capped Index (the FTSE MDB Index), provide a means by which investors can have direct exposure and assist with needed capital flows for sustainable development goals through ETF products.

What is an MDB? 

Multilateral Development Banks are supranational financial institutions with sovereign governments as members and their purpose is to encourage economic and social development. By issuing bonds in international capital markets MDBs raise funds which are then channeled into cheaper loans which developing nations can use to facilitate a variety of projects. The provision of such funding, alongside policy assistance and technical advice, means MDBs can play a critical role in economic development and help the global economy move closer towards its sustainable development goals.

With backing from multiple sovereign governments, MDBs benefit from Preferred Creditor Status (PCS), this along with their resilient capital structure and shareholder support, translates into very low credit risk for MDB bonds. Consequently, the majority of MDB bonds are rated the highest possible rating of triple A. As such, these high-quality securities offer investors an appealing low-risk alternative to sovereign bonds, whilst reaping the positives of meaningful sustainable investing.

Example issuer: 

The International Bank for Reconstruction and Development (IBRD) is one of the MDBs which is eligible for inclusion in the FTSE Multilateral Development Bank Bond Capped Index (the FTSE MDB Index). As recently as September of 2023, the IBRD committed US$150 million in loans to a project aimed at improving higher education in Senegal. Through the construction of new educational centres and provision of new teaching equipment, the project hopes to transform the country’s university system through increasing access to digital technology, improving research quality, and removing barriers to accessing higher level education.

And in August 2023, the Asian Development Bank (ADB), that is another index constituent, approved a $45 million financing package to help strengthen quality health care in 16 districts across 10 provinces in the Lao People’s Democratic Republic (Lao PDR).  As for climate funding, the African Development Bank (AfDB) approved a 30-megawatt photovoltaic solar power plant project in Eritrea.

Index construction:

The FTSE MDB Index is composed of US dollar denominated debt issued by multilateral development banks. Eligibility is restricted to MDBs that are backed by the G7 countries and where the MDBs make clear mission statements that state intent to promote sustainable economic development in developing countries. Criteria on the objectives which MDBs may actively contribute to include: reducing poverty, promoting equality, improving health and education, and delivering on activities in line with the Paris Agreement.  In the FTSE MDB Index, the market weight of the issuers is capped at 25%, as shown by figure 1, providing more diversified asset exposure.

Figure 2 – FTSE MDB Index Characteristics

AFRICAN DEVELOPMENT BANK 5 9.67 6.7 AAA 4.97 2.97 13.16
ASIAN DEVELOPMENT BANK 28 35.96 25 AAA 5.02 3.36 10.93
EUROPEAN BANK FOR RECON & DEV 4 8.88 6.2 AAA 5.2 2.5 22.92
INTER-AMERICAN DEVELOPMENT BANK 19 35.96 25 AAA 4.98 3.65 11.65
INTERNATIONAL BANK FOR RECON & DEV 26 35.96 25 AAA 4.98 3.78 11.04
INTERNATIONAL FINANCE CORP 7 11.38 7.9 AAA 5.1 2.63 9.28
FTSE MDB INDEX 93 143.83 100 AAA 5.01 3.41 12.24

Source: FTSE RUSSELL, as of 1st October 2023

In addition to eligibility based on engagement by MDBs in sustainable economic development projects, the FTSE MDB Index also requires issuers to have additional disclosures of safeguarding policies in place to alleviate environmental and social risks arising from their projects. Furthermore, FTSE used Sustainalytics’ Global Standard Screening to assess company compliance with relevant international norms and removes non-compliant issuers.

Investment rationale & index characteristics 

From a performance perspective, analysis shows that the FTSE MDB index has very similar risk/return characteristics to investing in US Treasuries 1-10 years, but with the added benefit of  improving the lives of those in emerging economies. Comparing the yield of the FTSE Multilateral Development Bank to the US Treasury 1-10 years, as per figure 1, shows that the index yields sit on-top of each other, implying that there is no yield trade-off (ignoring liquidity) and the FTSE MDB Index may be suitable for investors looking to implement an ESG Risk-off investment strategy. This is further enforced by figure 2, which shows the FTSE MDB index has an effective duration of 3.4 years and yield of 5%.

Despite the increasing demand in sustainable related funds, investors are often met by struggles with the trade-off between risk and return and sustainable objectives. In the case of MDB bond indices, both objectives are achievable.

Stay updated

Subscribe to an email recap from:


© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and/or their respective licensors.