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

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.