Economic Update

Published 17 Mar 2022

– Chile launched the world’s first sovereign sustainability-linked bond earlier this year

– Growing trend of climate-friendly debt issuance in emerging markets

– Total sustainable debt reached a record $1.2trn in 2021

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

In early March Chile, which has been affected by a decade-long drought, sold $2bn in US dollar-denominated sustainability-linked bonds (SLBs), becoming the first sovereign to do so.

In contrast to other types of green bonds that raise money to fund environmentally friendly developments such as solar and wind power projects, SLBs incentivise climate-positive solutions by incorporating a number of environmental objectives, along with a series of penalties for issuers if they fail to meet the goals.

In Chile’s case, the bond stipulates that the country may emit no more than 95 tonnes of carbon dioxide and equivalent by 2030, and that 60% of its electricity production should 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, the pipeline of SLB issuance has increased dramatically, from $11bn in 2020 to a record $110bn last year, according to Bloomberg data. International credit ratings agency Moody’s predicts that the figure will reach $200bn in 2022.

Innovative debt solutions gain traction

Chile’s SLB issuance is just one example of how emerging markets are experimenting with innovative, environmentally oriented financing tools.

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

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

Given that preserving marine ecosystems is key to Belize’s environment as well as its economy, the deal 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-metre-deep Blue Hole is considered one the best diving sites in the world. Tourism makes up around 40% of its GDP and workforce, while the fishing industry employs a further 10%.

While it was not the first debt-for-nature swap – Bolivia made the first such deal in 1987 – the development is an example of the increasingly diverse ways in which emerging markets are looking to raise funds, particularly given the growing international focus on ESG standards.

Another environmentally friendly form of finance is blue bonds. Similar in their function to green bonds, blue bonds are debt instruments issued to support investment in marine-friendly initiatives and the so-called blue economy.

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

Since then a number of institutions – among them 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 $151m, 15-year instrument that will finance ocean-related projects in Asia and the Pacific.

Sustainability finance reaches new heights

The expansion of sustainable finance offerings mirrors the growth of the broader ESG finance market.

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

This was driven primarily by the green bond market, which hit a historic high of $517.4bn, nearly doubling 2020’s total of $270bn. The CBI predicts the figure could reach up to $1trn this year.

Social, sustainability and transition bonds also recorded significant growth over the course of 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 proven itself to be a regional frontrunner. The government is the largest issuer of ESG bonds in Latin America, with a combined $33bn in value, 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 SR14.1bn ($3.8bn) green bond from four Saudi banks, with the funds dedicated to building 16 renewable energy-powered hotels across the country.

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

As countries continue their recoveries from the Covid-19 pandemic and seek to pursue carbon-neutral futures, innovative sustainability-focused debt instruments may prove to be attractive solutions for governments in many emerging markets – from both a financial and a policy perspective.