Sovereign Sustainability-Linked Bonds - Opportunities, challenges and pricing considerations
51 Pages Posted: 10 Sep 2021
Date Written: September 7, 2021
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: Suggested Citation