Stockholm (NordSIP) – As sustainable investing continues to gain momentum, fixed income instruments have become one of the most popular tools to pursue the means to finding the funding needed to support the transition. Among these, one of the fastest growing securities are sustainability-linked bonds (SLB), whose interest rate increases is allowed to experience a step-up should certain pre-agreed sustainable objectives of the issuer not be met.
Now, two months until COP-27 in Sharm el-Sheikh in Egypt, sustainable fixed-income market participants and stakeholders have announced a new Sustainability-linked Sovereign Debt Hub (SSDH), at the high-profile ‘International Cooperation Forum and Meeting of African Ministers of Finance, Economy and Environment’.
The SSDH
The Sustainability-linked Sovereign Debt Hub (SSDH) aims to connect stakeholders and support the creation of standards and tools that incorporate nature and climate considerations into the sovereign bond ecosystem.
The launch of the hub follows Chile’s issuance of a first-of-its-kind, US$2 billion SLB in March 2022. The SSDH aims to help reshape sovereign debt markets by providing issuers with technical guidance and connections to build nature and climate outcomes into sovereign bonds. Sovereign bonds are the largest asset class for many institutional investors, representing almost 40% of the $100 trillion global bond market.
An Advisory Board for the SSDH, with representatives of key stakeholders, including international and development finance institutions, financial sector associations, and advocacy and expert groups was announced.
SSDH Advisory Board
The hub’s Advisory Board includes the World Bank, European Bank for Reconstruction and Development (EBRD), Asian Infrastructure Investment Bank (AIIB), Asian Development Bank (ADB), International Capital Market Association (ICMA), Climate Bonds Initiative (CBI), The Nature Conservancy (TNC), the UN climate change high-level champion at COP 26, and the Institute of International Finance (IIF). The SSDH will be housed by NatureFinance, formerly known as the Finance for Biodiversity Initiative.
“We urgently need to re-route the trillions locked into sovereign bonds each year so they address the triple crisis of unprecedented debt levels, climate change, and nature loss. Sovereign bond markets can provide solutions to help address the global crises of climate change and nature loss and the accompanying financial, energy and food insecurity while increasing countries’ resilience by advancing fast and radical innovation in the field of nature KPI-linked sovereign debt instruments,” Simon Zadek, Executive Director of NatureFinance said.
“The Sustainability-linked Sovereign Debt Hub will help develop sovereign debt markets to make them as sensitive to the threats posed by biodiversity loss and climate change as they are to currency risk or unfavourable demographics. As part of the post COP27 financial infrastructure, it will facilitate market efficiency and encourage governments to integrate their dependence on natural capital and biodiversity with their lending activities” Zadek added.
“Governments in many countries are looking for innovative financial instruments to address the triple crisis of unprecedented debt levels, climate change and nature loss. World Bank teams have been working to design investments which can incentivise sovereign borrowers to achieve ambitious, predetermined sustainability performance objectives, measured using key performance indicators (KPIs). We look forward to working with partners through the SSDH initiative to scale up these solutions,” Fiona Stewart, Lead Financial Sector Specialist, Finance, Competitiveness, and Innovation Global Practice at the World Bank said.
