Sustainable-linked bonds: a financing solution for emerging markets?

Emerging markets are using the Environmental, Social and Governance (ESG) metrics to raise debt and finance their energy transformation, with Chile recently becoming the first country to issue bonds specifically tied to sustainable goals.

  • – Chile launched the world’s first sovereign durable-linked bond earlier this year
  • – Growing trend of providing climate-friendly loans in emerging markets
  • – Total sustainable debt reached a record $ 1.2trn in 2021

Chile, which was hit by a decade-long drought in early March, sold মার্কিন 2 billion in US dollar-rich sustainability-linked bonds (SLBs), becoming the first sovereign to do so.

Unlike other types of green bonds that raise money for environmentally friendly developments such as solar and wind power projects, SLB encourages climate-positive solutions that include many environmental objectives, including a series of penalties for issuers if they fail. Meeting goals.

In the case of Chile, the bond stipulates that the country will not emit more than 95 tons and equivalent of carbon dioxide by 2030 and that by 2032 60% of its electricity generation should come from renewable sources.

Although sovereign bonds have been slow to enter the market, the SLB segment is one of the fastest growing sectors of ESG finance.

Since the launch of the first performance-connected structure by Italian energy giant Enel in late 2019, according to Bloomberg, the SLB issuance pipeline has grown dramatically, from $ 11bn in 2020 to a record $ 110bn last year. The international credit rating agency Moody’s has predicted that this number will reach 200 200 billion by 2022.

Innovative loan solutions gain traction

Chile’s SLB issue is an example of how emerging markets are experimenting with innovative, environmentally friendly financing tools.

As OBG reported, in September last year the Belizean government introduced a debt exchange for nature to restructure its only sovereign bond.

The deal saw Belize buy back its debt at a significant discount – $ 0.55 cents per $ 1 – in exchange for increasing its efforts to protect the marine environment.

Preserving the marine ecosystem is key to Belize’s environment as well as its economy, and the agreement demonstrates the opportunity to combine financial, economic and environmental goals.

The country is home to the world’s second-largest barrier reef, and its 125-meter-deep blue hole is considered the world’s best diving site. Tourism accounts for about 40% of its GDP and workforce, while the fishing industry employs another 10%.

Although this was not the first debt-nature swap – Bolivia signed its first such agreement in 1987 – the development is an example of a increasingly diverse way in which emerging markets seek to raise funds, especially with the increasing international focus on ESG.

Another environmentally friendly form of money is the blue bond. Like green bonds, blue bonds are instruments of debt issued to support sea-friendly enterprises and investments in so-called blue economies.

The world’s first sovereign blue bond was launched in 2018, when Seychelles raised m 15m from international investors to help expand the maritime region and improve governance in its fisheries industry.

Since then a number of institutions – including Nordic Investment Bank and Morgan Stanley – have launched blue bonds. In September last year, the Asian Development Bank issued its first Blue Bond, a 1 151m, 15-year instrument that will finance ocean-related projects in Asia and the Pacific.

Sustainable financing has reached new heights

The expansion of the sustainable finance offer reflects the growth of the larger ESG finance market.

According to the Climate Bond Initiative (CBI), total durable debt reached a record $ 1.2 trillion last year.

It was initially driven by the green bond market, which reached a historic high of 17 517.4bn, almost double the 2020 total of $ 270bn. The CBI has predicted that this number could reach $ 1 trillion this year.

Social, sustainability and transition bonds also recorded significant growth by 2021.

Although Europe, North America and China are leaders on this front, several emerging markets are making substantial contributions.

Chile, having stopped selling its recent SLB, has proven itself as a regional pioneer. According to the CBI, the government is the largest issuer of ESG bonds in Latin America with a total value of $ 33bn, and the only country in the world to issue green bonds, social bonds and SLBs, according to the CBI.

Elsewhere in April, The Red Sea Development Company, the developer of the Saudi tourism project, secured an SR14.1bn (3.8bn) green bond from four Saudi banks, the fund dedicated to building 16 renewable energy-powered hotels across the country.

Meanwhile, as a sign of the green potential of Islamic financing, in June Indonesia raised $ 3 billion in sovereign sukuk (Islamic bonds) that would help finance sustainable development projects in the country.

As countries continue their recovery from the Covid-19 epidemic and seek to pursue a carbon-neutral future, innovative sustainable-centric lending instruments can be an attractive solution for governments in many emerging markets – both from a financial and policy perspective.

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