Sovereign Debt

Aligning Sustainability & Sovereign Debt

Today’s sovereign debt markets are not fit-for-purpose by failing to take adequate account of climate, nature and sustainability more broadly.

A new class of nature and climate KPI-linked sovereign debt instruments aims to generate liquidity through increased fiscal space and at the same time provide long-term structural changes to embed natural capital in sovereign debt markets.

These instruments – Nature Performance Bonds (NPBs), while tied to measurable targets for restoring wetlands, protecting forests, and reducing threats to wildlife and plant species, still allow for general use of proceeds. The NPBs can incentivise nature performance by offering a reduction in coupons payments and/or a principal adjustment on delivery of the targeted nature and climate outcomes.

NatureFinance’s work is being engaged by a growing number of market actors aligned with the view that radical innovation in the sovereign debt market is critical to unlocking a greener future and wellbeing for all.

Sustainability-linked Sovereign Debt Hub

The Sustainability-linked Sovereign Debt Hub was created to assist the development and scaling of sustainability-linked sovereign debt. The Hub is an inclusive cooperative space, bringing together actors from the entire spectrum of the sovereign sustainability-linked bonds universe. It is also a knowledge platform to expand and spread the expertise on integrating nature and climate into the sovereign debt markets. Read more

Nature Loss and Sovereign Credit Ratings

The results of recent work providing the world’s first biodiversity-adjusted sovereign credit ratings show how biodiversity loss translates into market risk for developed and emerging countries. Lkely impacts without interventions include downgrades, soaring borrowing cost, and a worsening systemic debt crises. View the report which highlights actions recommended for credit rating agencies, investors, and governments to help avert such consequences. Read more

Integrating Nature into Debt Sustainability Analysis

Without considering nature-related risks, financial authorities’ debt sustainability analyses will for many countries misdiagnose the true risks to debt sustainability, leading to erroneous policy recommendations and increasing the risk of avoidable debt crises. A recent paper provides compelling quantitative evidence that the inclusion of nature collapse scenarios is necessary to provide a full picture of debt sustainability risks to sovereigns.

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Gregor Pipan
Senior Associate, NatureFinance

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