Sustainability Bonds: A New Financing Solution for Emerging Markets


Emerging markets are leveraging environmental, social and governance (ESG) metrics to leverage debt and finance their energy transitions, with Chile recently becoming the first country to issue bonds specifically tied to sustainability goals.

In early March, Chile, which was hit by a decade of drought, sold $2 billion of US dollar-denominated sustainability bonds (SLBs), becoming the first sovereign borrower to do so.

Unlike other types of green bonds which raise funds to finance environmentally friendly developments such as solar and wind power projects, SLBs encourage climate positive solutions by incorporating a number of environmental targets, as well as a series of penalties for emitters if they fail to meet the targets.

In the case of Chile, the obligation stipulates that the country cannot emit more than 95 tons of carbon dioxide and equivalent by 2030, and that 60% of its electricity production must come from renewable sources by 2032.

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

Since Italian energy giant Enel first introduced the performance-linked structure in late 2019, SLB’s emissions pipeline has grown significantly, from $11 billion in 2020 to a record $110 billion. dollars last year, according to data from Bloomberg. The international rating agency Moody’s predicts that this figure will reach 200 billion dollars in 2022.

Innovative debt solutions are gaining ground

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

As OBG reported, in September last year, the government of Belize launched a debt-for-nature swap to restructure its only sovereign bond.

The deal saw Belize redeem its debt at a significant discount – 0.55 cents on every dollar – in exchange for increased efforts to protect its marine environment.

Since the preservation of marine ecosystems is essential to Belize’s environment and economy, the agreement demonstrates the possibility of combining financial, economic and environmental objectives.

The country is home to the second largest barrier reef in the world and its 125 meter deep Blue Hole is considered one of the best dive sites in the world. Tourism accounts for around 40% of its GDP and workforce, while the fishing industry employs another 10%.

While not the first debt-for-nature swap — Bolivia struck the first such deal in 1987 — the development is an example of the increasingly diverse ways in which emerging markets seek to raise funds, especially given the growing international focus on ESG. standards.

Blue bonds are another environmentally friendly form of financing. Similar in function to green bonds, blue bonds are debt securities issued to support investments in sea-friendly initiatives and the so-called blue economy.

The world’s first sovereign blue bond was launched in 2018, when Seychelles raised $15 million from international investors to help fund the expansion of marine areas and improve the governance of its fishing industry.

Since then, a number of institutions, including the Nordic Investment Bank and Morgan Stanley, have launched blue bonds. In September last year, the Asian Development Bank issued its first-ever blue bond, a 15-year, $151 million instrument that will fund ocean-related projects in Asia and the Pacific.

Sustainable finance reaches new heights

The development of sustainable finance offers reflects the growth of the broader ESG financial market.

According to the Climate Bonds Initiative (CBI), total sustainable debt reached a record $1.2 billion last year.

This was mainly driven by the green bond market, which hit an all-time high of $517.4 billion, nearly doubling the 2020 total of $270 billion. The CBI predicts that figure could reach $1 billion this year.

Social, sustainability and transition bonds also saw significant growth during 2021.

Although Europe, North America and China are leaders on this front, a number of emerging markets are making considerable contributions.

Chile, fresh off its recent SLB sale, has emerged as a regional leader. The government is the largest issuer of ESG bonds in Latin America, with a combined value of $33 billion, and is the only country in the world to have issued green bonds, social bonds and SLBs, according to the CBI.

Elsewhere, in April, Saudi tourism project developer The Red Sea Development Company secured a SR14.1 billion ($3.8 billion) green bond from four Saudi banks, with the funds earmarked for the construction of 16 hotels powered by renewable energy across the country.

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

As countries continue their recovery from the Covid-19 pandemic and seek to aim for a carbon-neutral future, innovative sustainability-focused debt instruments may prove to be attractive solutions for governments in many emerging markets, both both financially and politically.

By Oxford Business Group

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