Governments in many countries are looking for innovative financial instruments to tackle the triple crisis of unprecedented debt levels, climate change and the loss of nature. Sovereign bonds – accounting for nearly 40% of the global $ 100,000 billion bond market – are the largest asset class in the portfolios of many institutional investors. 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 necessary to take action to avoid the negative impacts of climate shocks and loss of nature, especially as a result of the pandemic crisis.

An instrument to link sustainable sovereign financing to national climate and environment commitments could be sustainability bonds (SLBs), which are growing rapidly in the corporate debt market and are now being considered for sovereign issuers. These financial instruments aim to encourage the borrower to achieve ambitious and predetermined sustainability performance targets, measured using key performance indicators (KPIs). Unlike green bonds and other labeled sustainability bonds, SLBs are not reserved for specific projects or expenses; on the contrary, payment to investors in the bond depends on whether the issuer meets the agreed performance indicators.

A new report from the World Bank – Striking the Right Note: Key Performance Indicators for Sovereign Sustainability-Linked Bonds – presents a framework to bridge the gap between what sovereign investors would see as sufficiently ambitious actions and what issuing countries see as achievable goals. Building on the “Principles of Sustainability Bonds” set out by the International Capital Market Association (ICMA), the report provides initial guidance on what a framework for assessing the adequacy of KPIs might look like. Metrics include whether a potential indicator is sufficiently robust, correctly interpreted, aligned with the country context, and credibly ambitious. The report describes a top-down approach, designed to make the process of setting and monitoring KPIs as easy as possible, while taking into account country priorities and context.

The report reviews existing datasets to identify potential KPIs that could be used by sovereign SLBs to determine sustainability performance goals (with particular emphasis on climate and nature related goals). Leveraging existing datasets compiled by respected third parties could reduce the administrative burden for small public debt management teams, encourage standardization and build confidence in these new instruments. Many of the metrics included in the long list in this report are common across multiple datasets and are already being used as KPIs in various contexts. The list of identified KPIs should evolve over time to reflect the most important development, climate and environmental priorities. For example, the list could be updated based on ongoing political developments and international negotiations at the United Nations Framework Convention on Climate Change. [UNFCCC] and Convention on Biological Diversity [CBD] Meetings of the Conferences of the Parties.

The report offers a set of criteria to assess the robustness of the data, including:

• Are the data available at a reasonable cost or accessible to the public for the foreseeable future?

• Can the indicator plausibly be associated with sovereign interventions?

• Are the data up to date and produced with sufficient frequency?

• Is the data provided regularly and over a considerably long period of time?

• Are the data in the datasets consistent across countries?

One of the main challenges of using existing data sets as KPIs for sovereign SLBs is the lack of timely data. It will be important to establish methods for defining acceptable reporting periods and for determining how and when to credit sustainable performance. Emerging technologies could potentially address this challenge by providing real-time data in the future, although further testing is needed to assess whether such solutions are appropriate in the EMDE context.

Assigning outcome-based indicators is a particular challenge for sovereign SLBs – as these may depend on factors beyond the control of government – and ensuring alignment with the country context also requires attention. Additional monitoring may be necessary for some KPIs in order to assess their actual contribution to sustainability performance targets. A combination of political and short-term indicators and long-term results indicators could be used to ensure that results are aligned with long-term development goals and reflect genuine sovereign interventions rather than independent factors of governance. will of the government.

There are also various ways to assess the ambition of goals. Potential options include:

• Assess alignment with internationally agreed targets (for example, temperature targets of 1.5-2 ° C under the Paris Agreement).

• Develop eligibility criteria (eg positive or negative lists).

• Benchmarking with comparable countries.

• Issuance of benchmarks (eg targets for a baseline year or business-as-usual scenario).

• Assess planetary boundaries (eg, the level of resources that meet people’s needs without exceeding critical planetary boundaries).

Each of these options has their own advantages and disadvantages which should be carefully considered.

Giving an economic value to many KPIs (such as measures of biodiversity, water or air quality) is still an emerging concept. Making the link between sustainable results, economic impact – and ultimately market pricing – through KPIs will therefore have to be an art in the early stages, as is the case with the start of most new financial instruments. . Further analysis will be required to better understand how to effectively value and trade sovereign SLBs, as this will be essential to ensure long-term market scalability. EMDEs with a high cost of capital (and significant natural capital resources to protect) are likely to be the most interested in sovereign SLBs. The issuance of these instruments must contribute to improving debt sustainability and not lead to further increases in the debt burden of these countries.

The report recognizes that pilot projects and in-country consultations are needed to better understand how KPIs for sovereign SLBs could be developed in practice to address the triple crisis. The World Bank team looks forward to continuing to work with partners to help governments and investors get it right by using the right metrics.