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Sovereigns and sustainable bonds: challenges and new options

The sustainable bond market, comprising green, social and sustainability (GSS) bonds, continues to develop rapidly. Until recently, sovereign issuers played only a minor role, due in part to tensions between the use-of-proceeds earmarking of GSS bonds and the fungibility requirements for many sovereigns. That said, sovereign GSS bond frameworks rely on stringent reporting and verification standards, thus setting goalposts for private issuers to aim for. Sustainability-linked bonds allow an unrestricted use of proceeds and – if based on contractual terms that sufficiently align issuers' incentives with sustainability objectives – can provide sovereigns with new options to make progress towards carbon emission reduction targets.