Investor groups and development banks have thrown their weight behind a new initiative to boost the supply of sustainability-linked sovereign bonds.
The Sustainability-linked Sovereign Debt Hub (SSDH), launched today by non-profit Finance For Biodiversity, will provide technical support and outreach to encourage governments to take up the structure, which has already proved popular with investors in the corporate bond market.
Unlike green bonds, in which the capital raised must be spent on green projects, sustainability-linked debt can be used for general corporate purposes but the interest rate is tied to whether an issuer meets entity-level ESG targets.
While numerous governments have green bond programmes, Chile is the only country to have issued a sustainability-linked bond. But Simon Zadek, Finance For Biodiversity’s chair, told IPE it could be a more effective structure for sovereigns – particularly those in developing and emerging markets.
“Green bonds haven’t brought significant benefits to less developed countries, whereas – on the other side of the balance sheet – the sustainable finance industry has pushed for climate and nature risk to be integrated into credit analysis and risk pricing, and that’s penalised the poorest countries in the world because they’re often the most vulnerable to these risks. So we have a problem of asymmetry.”
The SSDH was launched at a ministerial gathering in Egypt, as the country prepares to host November’s COP27 climate negotiations. The International Capital Markets Association (ICMA), World Bank, European Bank for Reconstruction and Development, Asian Infrastructure Investment Bank, Climate Bond Initiative, Nature Conservancy and Institute of International Finance will all be represented on its advisory board.
As well as outreach and training, efforts will focus on exploring the most suitable targets and metrics for governments, and potentially developing dedicated standards for the segment.
“What we need is not simply KPIs that lead to positive climate and nature outcomes. We need ones that lead to increased resilience, which can in turn lead to improved economic conditions, which should have a much broader impact on the cost of capital than just lowering the pricing of an individual deal,” said Zadek. “So we want these instruments to create a feedback effect right back to the dashboards of mainstream bond traders.”
Zadek is encouraging investors to reach out with feedback on what they want from the market, and to find out how they can engage with sovereign debtors to help stimulate issuance.
Valérie Guillaumin, a sustainable finance director at ICMA, which hosts the Sustainability-linked Bonds Principles, told IPE that it was not yet confirmed whether the body would develop dedicated standards for sovereign issuance, but said: “Sovereign sustainability-linked bonds will certainly be discussed within a subgroup of the Sustainability Linked Bonds working group”.
The SSDH is expected to become fully operational by November 2022.