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.

Low- and middle-income countries harbour a significant portion of the world’s biodiversity and are home to unique and endemic species. At the same time, these countries suffer from high levels of public debt, and face restricted access to international debt markets.

Twin climate and biodiversity crises pose both immediate and long-term risks to their economies, citizens and investors. Such countries thus face further deterioration of their credit ratings, economies, and biodiversity, as communities turn to practices that deplete nature to support their livelihoods.

Climate change and biodiversity destruction thus threatens a vicious cycle of rising debt, and spiralling nature loss and climate damage.

Sustainability-linked sovereign debt works by turning this vicious cycle into a virtuous circle. Investors offer a lower interest rate on a government’s national debt, in return for commitments to invest in nature restoration, greenhouse gas emissions cuts, and climate resilience.

Sustainability-linked debt can thus address the triple challenge of public debt distress, climate shocks and nature degradation. It works by incorporating the real economic harm caused by nature loss into sovereign debt ratings and sustainability.

Critical to the concept is a functioning set of material and quantifiable key performance indicators (KPIs), that investors can lend against. KPIs, and related performance targets, will capture improvement in nature-based infrastructure, and links to economic resilience.

Scaling of sustainability-linked bonds will also require technical assistance, on structuring bonds, to satisfy investors.

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

NatureFinance has launched the Sustainability-linked Sovereign Debt Hub (SSDH), to assist, by serving as an inclusive, cooperative space, to shape and share expertise on integrating nature and climate into sovereign debt markets.

Participants include development finance institutions (DFIs), and insurers and reinsurers, who can develop new approaches for cutting the cost of investing in sustainability-linked sovereign debt. 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. Likely 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.

Read more

Contact us

Gregor Pipan
Senior Associate, NatureFinance
gregor.pipan@naturefinance.net

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