Hidden GEMs: Taking stock of the EM sovereign sustainable bond market
18 Oct, 2023

Nicolas Jaquier, investment specialist at Ninety One


This growing and evolving EM investment universe provides a compelling long-term opportunity for investors to balance sustainability and return objectives, and a direct way to participate in a just transition. While opportunities abound, a careful assessment is crucial. Ninety One investment specialist, Nicolas Jaquier, charts the evolution of the market – where EM issuers are increasingly pushing boundaries – and provides insights and pointers for investors.


Sovereign green, social and sustainable bond (GSS) issuance has grown rapidly in recent years, but these bonds still only account for 5% of total outstanding sovereign debt. Sovereigns have been relatively late entrants to sustainable bond markets following corporates and supra-national entities (such as the World Bank and the European Bank for Reconstruction and Development), which issued the first green debt securities in the mid-2000s. Poland and France were the first governments to issue green bonds in 2016 and 2017 respectively.  The market has been maturing rapidly since then, with the development of social and sustainable bond issuance and then sustainability-linked bonds (SLB) more recently.


Social bond issuance picked up significantly in 2020 as governments implemented large support programmes and allocated bond proceeds to address the health crisis caused by COVID-19. Since then, other countries have begun to tap the broader GSS bond market – e.g., in 2022, the Philippines issued its first sustainable bond, the proceeds of which are earmarked for green projects as well as targeted social projects aiming to improve the country’s healthcare, education system and food security. Looking ahead, vast sums of money will be needed for the global energy transition, making transition finance a key focus of the GSS market.


Amount outstanding, by instrument (US$ million)

Source: Sovereigns and sustainable bonds: challenges and new options, from BIS Quarterly Review, September 2022. Data sourced from Climate Bonds Initiative, Dealogic, Environmental Finance Bond database, authors’ calculations. Figures shown to right of chart are as at 30 June 2022.


The number of countries establishing a presence in sustainable bond markets has grown to 38 globally. Some EM countries have become leaders in this field. For instance, Chile has grown the proportion of sustainable debt to 30% of its total debt stock and is aiming to increase this to over half within the next two to three years. This is encouraging, as the capital required to achieve the energy transition predominantly needs to go to EM yet that’s where allocations are currently lowest. Tapping the growing GSS bond market can help plug that gap, while presenting investors with compelling risk-return potential.


Typically, the GSS market has been dominated by issuance in hard currency (US dollars or Euros), although a few sovereigns have now started to issue GSS bonds in local currency (for instance Colombia, Chile, and Thailand). This is heartening, as sovereigns, especially smaller/frontier sovereigns, cannot exclusively rely on foreign currency debt to finance the energy transition and need to be able to borrow in their local currencies to mitigate risks and adapt to climate change. In addition, this helps develop sustainable finance in their home markets. We expect continued growth and diversification in this sector.


Another challenge facing small and frontier economies relates to their ability to source enough green projects to package into a benchmark-size bond issue. Here, the sovereign SLB market can help. In contrast to GSSS bonds, SLBs do not attach proceeds to fund specific projects. Instead, the issuer commits to reaching sustainability targets and risks incurring a financial penalty (higher coupon payments) if it misses these. These are powerful funding instruments that can have a far-reaching impact when embedded targets are met (such as tonnes of CO2 reduced/avoided, energy savings, or number of additional beneficiaries of targeted social programmes). SLB issuance sends a strong signal of a country’s commitment to climate targets and allows even small sovereign issuers to establish a presence on sustainable finance markets.  That the only two sovereigns to have issued an SLB to date are emerging markets is another sign of the pivotal role that emerging markets will play in this growing asset class. Chile and Uruguay made commitments to curb emissions, increase the share of renewables in energy generation and protect native forests, in line with their Nationally Determined Contributions (NDCs). We expect more countries to follow.


Rapid growth in GSS issuance doesn’t come without challenges for investors. Labelled bonds can stand accused of “greenwashing” if a robust sustainable framework is not in place. Therefore, it is important for investors to be selective and test these frameworks not only against established standards such as The International Capital Market Association’s (ICMA) Green Bond Principles, but also against market best practice. For instance, GSS frameworks should ensure strict exclusion lists that are relevant to the issuer, some independent oversight in the project selection process, and a critical assessment from a reputable third-party provider, such as Sustainalytics or Moody’s ESG Solutions. We believe investors can also benefit from aligning their assessment framework with EMIA’s enhanced labelled bond principles – including a focus on the strength and ambition of key performance indicators (KPIs).


Standards have improved significantly as the market has matured and sovereigns have typically led the way in promoting best practices. It is also important to monitor allocation and impact reports, which are now starting to be publishes. These are useful resources to monitor progress ex-post and confirm adherence to ex-ante commitments included in the initial bond frameworks.


For asset managers, engaging in conversations with sovereigns to help structure and assess their sustainability targets is important; it helps to establish a dialogue and ensure allocations in the new issue market – where supply is still limited relative to the pool of demand, with issues generally highly oversubscribed and hence well-funded.





@Nicolas Jaquier
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