Striking the right note: Key performance indicators for sovereign sustainability-linked bonds

Governments in many countries are looking for innovative financial instruments to address the triple crisis of unprecedented debt levels, climate change and nature loss. Sovereign bonds – representing almost 40% of the $100 trillion global bond market -- are the largest asset class in many institutional investors’ portfolios. They are one of the key instruments for channeling capital to emerging markets and developing economies (EMDEs). Yet many developing countries are unable to deploy the capital needed to take action to avoid negative impacts of climate shocks and nature loss, particularly following the pandemic crisis.

One instrument to link sustainable sovereign financing with national climate and environmental commitments could be sustainability-linked bonds (SLBs), which are growing fast in the corporate debt market and are now being considered for sovereign issuers.  These financial instruments aim to incentivize the borrower to achieve ambitious, predetermined sustainability performance objectives, measured using key performance indicators (KPIs). Unlike green and other sustainability-labeled bonds, SLBs are not ring-fenced for particular projects or spending; rather, the payout to investors in the bond depends on whether the issuer meets agreed-upon performance indicators.

A new World Bank report - Striking the Right Note: Key Performance Indicators for Sovereign Sustainability-Linked Bonds - presents a framework to bridge the gap between what sovereign investors would view as appropriately ambitious actions and what issuing countries see as achievable targets. Building on the “Sustainability-Linked Bond Principles” set out by the International Capital Market Association (ICMA), the report provides initial guidance on what a framework for assessing the suitability of KPIs might look like. The metrics include whether a potential indicator is sufficiently robust, properly interpreted, aligned with the country context and credibly ambitious. The report outlines a top-down approach, designed to make the KPI setting and monitoring process as simple as possible, while considering countries’ priorities and context. […]