Emerging perspectives

Small but powerful: sustainability-linked bonds in emerging markets

Nicolas Jaquier explains how green, social, sustainable and sustainability-linked bonds could spur financing in emerging markets’ sustainable growth and development, and considers recent trends and key considerations for investors.

Jan 11, 2023

6 minutes

Nicolas Jaquier

Fast view

  • The green, social, sustainable and sustainability-linked bond (GSSS bond) market has real potential to play a central role in funding sustainable growth and development in emerging markets. Emerging Market (EM) issuers are becoming innovators in this field.
  • The EM GSSS bond market has significant growth potential, given the huge amount of capital needed to finance the EM energy transition. Specifically, sustainability-linked bonds represent a flexible financing solution for EM sovereigns while also offering smaller countries an effective route into sustainable finance markets.
  • Chile is a pioneer in this field, having issued under each of the green, social and sustainable labels and recently issuing its first sustainability-linked bond. Uruguay’s recently launched sustainability-linked bond framework - which embeds climate change mitigation and nature conservation goals – provides an innovative template for other countries to follow.
  • Investors should take a selective approach to investing in GSSS bonds given the huge disparity across a range of factors, spanning use of proceeds, independent oversight, and transparency of reporting.

A nascent market, especially for EM

Global issuance of green, social, sustainable and sustainability-linked bonds (GSSS bonds) – defined in the box below – has grown by 80% a year on average.1 Despite this, GSSS bonds still only account for a small proportion of the overall sovereign bond market. Activity in this field remains concentrated in developed markets, with emerging markets accounting for only 6% of total issuance. However, EM issuers “have shown the greatest appetite for innovative instruments such as the newer sustainability and sustainability-linked bonds,” according to the OECD.2

Given the vast sums of capital needed by emerging markets to finance the energy transition, this is – arguably – an area of the bond market where the needs are greatest.

Defining the market

Green, social and sustainable bonds: use of proceeds is a specific green, social or sustainable project.

  • Green bonds: proceeds will be allocated towards green projects or activities that promote climate change mitigation or adaptation, or other environmental sustainability purposes.
  • Social bonds: proceeds will be allocated towards projects that promote improved social welfare and positive social impact directly for underprivileged, low income, marginalised, excluded or disadvantaged populations.
  • Sustainable bonds: proceeds will be allocated towards projects that are dedicated to environmentally sustainable outcomes (green or social projects).

Sustainability-linked bonds: indicates that the terms of a bond are aligned with performance against relevant sustainability targets. According to the International Capital Market Association, “Sustainability-Linked Bonds incentivise the issuer’s achievement of material, quantitative, pre-determined, ambitious, regularly monitored and externally verified sustainability (ESG) objectives through Key Performance Indicators “KPIs” and Sustainability Performance Targets (“SPT”).”

GSSS bonds: all of the above.

A powerful potential source of finance

GSSS bond issuance in emerging markets has the potential to drive transformation in public budget planning and execution, while aligning public sector financing with sustainable development objectives. Managed successfully, GSSS bonds could be central to the implementation of countries’ Integrated National Financing Frameworks and Nationally Determined Contributions (NDCs), suggesting a broad and key role in funding sustainable growth and development.

The benefit of sustainability-linked bonds (SLBs) for emerging markets is that the use of proceeds for these is unrestricted, unlike for GSS bonds, where proceeds must be channelled to specific (green, social, or sustainable) projects and activities. This fungibility is important, especially as it is one of the key principles of public financial management and one that is cemented in constitutions. “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.”3

A key question is whether these new instruments will have the ability to unlock funding for emerging markets that might otherwise struggle to meet the same sustainability criteria as developed markets. For smaller countries in particular – whose sustainable projects may be too small to package up into a GSS bond issue – SLBs offer a means of establishing a presence on sustainable finance markets and signalling commitment to climate efforts.

First mover: Chile

Chile was the first country in Latin America and one of the first emerging markets to issue a green bond with its debut issue in 2019. To get to that point and to develop its Green Bond Framework, the Ministry of Finance began a year-long process to build internal capacity and one that also involved other key ministries.

More broadly, Chile is the leading example of the value of diversified debt issuance. It is the only sovereign to have issued under all three of the GSS labels - green, social and sustainability. Chile has also recently issued an SLB, opening the possibility for it to issue more of its debt in future under this format. The SLB is linked to two key performance indicators (KPIs): absolute Greenhouse Gas emissions and the proportion of renewables in the electricity system.

Game changer: Uruguay

In Q4 2022, Uruguay raised US$1.5 billion in an SLB with a 12-year maturity. Uruguay followed a similar process to Chile’s Green Bond initiative, which explains the substantial length of time it took to finally bring the issuance from the time of announcing its intent. Uruguay’s Sovereign SLB framework has been a key focus area of our engagements with the country’s policymakers; our discussions have included the country’s NDCs and targets under its SLB issuance.

The framework is an initiative involving five of the country’s ministries: Economy and Finance; Environment; Industry, Energy and Mining; Agriculture, Livestock and Fisheries; and Foreign Relations. It has attracted a strong endorsement from Sustainalytics, which assessed the KPIs (outlined below) as “strong” and the two Sustainability Performance Targets as “ambitious” and “highly ambitious”. The SLB’s two KPIs are linked to climate change mitigation and nature conservation goals, respectively. The first target is a reduction of the intensity of Greenhouse Gas emissions and the second relates to the preservation of the area of native forests in the country (limiting deforestation), which is an innovative approach.

The Sustainability Performance Targets (SPTs) of Uruguay’s SLB are based on quantitative goals set for 2025 and are in line with the country’s NDCs under the Paris Agreement. Uruguay has already made significant progress on this front in recent years, e.g., by shifting its electricity generation almost entirely to renewables. Given this, further improvements will require decarbonising the country’s transportation fleet and reducing methane emissions from its large agricultural sector – challenging feats that attest to the ambitious nature of Uruguay’s targets.

Uruguay’s innovative framework paves the way for other countries to follow a similar path. For example, Costa Rica is considering issuing a bond under one of the GSSS labels and, to this end, it could take inspiration from Chile and Uruguay.

Assessing GSSS bonds

While we believe that all the types of bonds mentioned above will have an increasingly important role to play in EM debt portfolios, we believe that investment in these issues requires knowledge and selectivity. That’s why we strive to be at the forefront of discussions with EM debt management offices on the potential for ESG-linked bond issuance and have developed our own framework within which to analyse issuance.

Our framework for analysing these bonds is aligned with Emerging Markets Investors Alliance – EMIA’s – enhanced labelled bond principles. For instance, we focus on whether independent oversight is provided and the degree of transparency provided in reporting. Other factors we consider include:

  • Use of proceeds: green/social; new projects vs. refinancing; comprehensive exclusion lists
  • Extent of community and grassroot involvement; independent oversight
  • Ring-fencing of proceeds; annual impact reports; potential recourse on misuse of funds; KPIs in reporting
  • For SLBs: number, strength and ambition of KPIs; checkpoints before KPI trigger.


While the EM sovereign GSSS bond market is nascent, several EM sovereigns are leading the way on innovation. The growth potential of this market is huge – especially for sustainability-linked bonds – not least because of the vast sums of capital needed by emerging markets to finance the energy transition.


1 https://www.oecd.org/dac/green-social-sustainability-and-sustainability-linked-bonds.pdf.
2 Source as above. The 6% figure cited relates to the proportion of GSSS bonds from issuers in countries eligible for donor support in the form of official development assistance.
3 https://www.bis.org/publ/qtrpdf/r_qt2209d.htm


General risks. All investments carry the risk of capital loss.

Authored by

Nicolas Jaquier
Portfolio Manager

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