New platform will provide support and network to incorporate nature and climate outcomes into sovereign debt
The new Sustainability-linked Sovereign Debt Hub (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.
An Advisory Board for the landmark platform, with representatives of key stakeholders, including international and development finance institutions, financial sector associations, and advocacy and expert groups was announced at the high-profile ‘International Cooperation Forum and Meeting of African Ministers of Finance, Economy and Environment’, which marks the two-month countdown to COP27.
(8th September 2022, London). With exactly two months until COP-27 in Sharm el-Sheikh in Egypt, an ambitious platform to boost the development of Sustainability-linked Sovereign Bonds has been announced today.
Sovereign bonds are the largest asset class for many institutional investors, representing almost 40% of the $100 trillion global bond market. In March 2022, Chile announced its newest initiative: a first-of-its-kind, US$2 billion sustainability-linked bond offering (SLB). Chile’s issuance demonstrates that nature and climate risks (such as the degradation of forests and fisheries) can be adequately integrated into debt offerings.
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 SSDH will be housed by NatureFinance, formerly known as the Finance for Biodiversity Initiative and will be supported by an Advisory Board consisting of, among others, 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).
Simon Zadek, Executive Director of NatureFinance said: “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.”
“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”.
SSDH aims to help scale the issuance of Sustainability-linked Sovereign Bonds and set in motion a self-sustainable virtuous cycle which:
● Enables the engagement of sovereign debtors and creditors to raise the awareness and use of sustainability-linked sovereign bonds.
● Rewards positive nature and climate outcomes directly through reduced costs of capital.
● Supports the design and use of performance-linked sovereign bonds.
● Develops and supports the use of data-rich KPI platforms for individual debt offerings and for use across a broader population of sustainability linked sovereign bond offerings.
● Increases awareness and experience in using performance-linked sovereign debt instruments through convenings, research and capability development.
● Supports the development of enabling standards and other tools that facilitate the integration of nature and climate into sovereign debt instruments design and markets.
Fiona Stewart, Lead Financial Sector Specialist, Finance, Competitiveness, and Innovation Global Practice at the World Bank said:
“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.”
Dr Mahmoud Mohieldin, UN Climate Change High Level Champion for Egypt said: “The impacts of climate change are worsening at a far greater speed than had been anticipated, with the world’s poorest countries bearing the highest cost. In order to achieve the ambitious climate-action agenda, we need to consider all sources of finance, conventional and innovative, public and private, external and domestic. One area of new work is the development of a new generation of debt for climate and debt for nature investment mechanisms, which will help in debt management and inject new flows of funds into climate and nature at the same time.
“The Sustainability-linked Sovereign Debt Hub will play a vital and welcome role in catalysing the market for KPI linked debt issuances and in helping to ensure that countries’ climate and nature related policies are reinforced, thereby helping to stimulate investment to support the Sustainable Development Goals.”
The SSDH is expected to become fully operational by November 2022.
Notes to editor
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