Sovereign Sustainability-Linked Bonds - Opportunities, challenges and pricing considerations

51 Pages Posted: 10 Sep 2021

See all articles by abdeldjellil bouzidi, Ph.D.

abdeldjellil bouzidi, Ph.D.

CEPN; Terra Nova (think tank); The Bridge Tank; Emena Advisory; Autorité de la Statistique Publique

Denis Papaioannou

Tenokonda Ltd

Date Written: September 7, 2021

Abstract

Sustainability-Linked Bonds (SLB) are quickly developing in the corporate space. The market
is expected to grow steadily in 2021 with total issuance ranging between 100 and 150 billion
$ after a quarterly record of $31 billion of SLB issuance in the second quarter. As sovereign
issuers are starting to analyze the opportunities and challenges to issue a SLB, the objective of
this working paper is to suggest a framework to choose KPIs and Sustainability Performance
Targets for a country. We suggest a framework based on the ESG financial risk materiality and
the macroeconomic impact of KPIs linked to Sustainability Development Goals (SDGs).

The paper is mainly targeting Debt Management Offices (DMO), investors and investment bank
structuring and risk management teams interested in this new asset class. In this article, we
describe SLBs, their specificities and analyse the market for corporate SLBs. We try to answer
the question of the financial and sustainability structuring for a sovereign issuer interested in
SLBs. We derive a formula for estimating the SPT default probability allowing investors and
issuers to evaluate and monitor SLB characteristics and performance. This could also allow to
compare countries internationally as well as improving discussions in climate summits like COPs.
A discussion with the key questions faced by investors and issuers concludes this article.

Keywords: sustainability-linked bonds, sustainable development goals, climate change, sustainability, sustainable finance innovation, contingent pricing, sovereign debt

JEL Classification: Q56, Q5, G13, H63

Suggested Citation

bouzidi, abdeldjellil and Papaioannou, Denis, Sovereign Sustainability-Linked Bonds - Opportunities, challenges and pricing considerations (September 7, 2021). Available at SSRN: https://ssrn.com/abstract=3919159 or http://dx.doi.org/10.2139/ssrn.3919159

Abdeldjellil Bouzidi (Contact Author)

CEPN ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

HOME PAGE: http://cepn.univ-paris13.fr/les-membres-associes/

Terra Nova (think tank) ( email )

37 rue beaubourg
Paris, 75003

HOME PAGE: http://tnova.fr/qui-sommes-nous/direction-et-permanents

The Bridge Tank ( email )

Palais Brongniart, 28 Place de la Bourse
Paris, 75002
France

HOME PAGE: http://thebridgetank.org/

Emena Advisory ( email )

Paris, 75015

HOME PAGE: http://www.emena-advisory.com

Autorité de la Statistique Publique ( email )

88 Avenue Verdier CS 70058
Montrouge, 92541
France

HOME PAGE: http://www.autorite-statistique-publique.fr/les-membres-de-lasp/

Denis Papaioannou

Tenokonda Ltd ( email )

London
United Kingdom

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