Key messages:

- In the 2020s sovereign bonds will face the strategic challenge of achieving alignment with the Sustainable Development Goals.

- Agriculture and the soft commodity trade are heavily linked to natural capital, as drivers of depletion and as processes reliant on a secure stream of ecosystem services.

-The value of sovereign bonds relies in part on the management of natural capital by the countries concerned. However, this dependency is still largely ignored or mispriced in sovereign bond markets.

-Pressures to achieve alignment between sovereign bonds and environmental sustainability are set to intensify in the decade ahead, with increasing focus on sovereign bonds as an asset class which connects macro-economic performance and capital markets.

-To enable analysts to integrate the value of natural capital into the issuance, analysis and stewardship of sovereign bonds, we have developed a new research framework. This identifies Argentina and Brazil as the G20 countries most dependent on natural capital for their exports.

- We estimate that 28 per cent of Argentina’s sovereign bonds and 34 per cent of Brazil’s sovereign bonds will be exposed to an anticipated tightening of climate and anti-deforestation policy in the 2020s, while 44 per cent and 22 per cent of their sovereign bonds, respectively, are exposed to changes in policy after 2030.