First Sovereign Sustainability-Linked Bonds more than 4 times oversubscribed with Chile’s lead

Ending the year 2022 marks a remarkable progress step for the Clarity Coalition’s decade old agenda – Bridging the Gaps between Investment and Global Resource Trends. Stemming from the intense work since 2005 of Prof. Michael Mainelli, Abdeldjellil Bouzidi and Simon Mills, the Government of Chile (March 2022) has issued the first Sovereign Sustainability-Linked (Policy Performance) Bond (SSLB) and the Government of Uruguay (October 2022) has followed suit with support from the Inter-American Development Bank. Our prediction, supported by a number of key players in Global Financial Services, is that SSLBs are the most significant step to date in the  Vision 2050 Sustainable Development Agenda  working towards True Value Economies.

Sustainability-Linked Bonds are NOT standard Green Bonds.  Prof. Mainelli’s original idea came from Sovereign Inflation-Linked Bonds which give investors a hedge against inflation targets – simply put, inflation goes up, these Policy Performance Bonds pay more to the investor. As with any sovereign debt, the financing generated can be used on any state funding priorities such as education, health and infrastructure, but it is in the interest of the entire nation  – state & tax payer – to achieve the cheapest debt payments by meeting the targets/commitments to which the bond is attached (i.e. originally low inflation and now Sustainable Development Goal priorities such as CO2e emissions reduction; renewable energy %; native forestation & biodiversity hectares, %, density, species no.; zero-plastic; beyond fair-trade value chain income $, women’s education & jobs with green technologies %, no).

It follows that the principle holistic goal of Sovereign Sustainability-Linked Bonds (SSLBs) is not necessarily designed to finance the sustainable development targets to which they are attached, which can also be achieved through regulation and say co-operative instruments. SSLBs potentially provide the enabling environment to vastly scale up private investment by providing a risk-reward ‘hedge’ for impact, boutique and mainstream investors on policy timing, including tax reforms to meet the SSLB targets.

For Emerging Economies SSLBs offer realistic interest rates on developing country sovereign debt. The Chilean SSLB at 4.346% interest for US$ 2 Billion initial offering was over 4 times oversubscribed.

Chile (March 2022) Issues World’s First Sovereign Sustainability-Linked Policy Performance Bond

The Uruguayan SSLB attracted 188 investors from Europe, Asia, US and Latin America 21% of which were new holders of Uruguayan debt. This Sustainability-Linked Bond ‘model’ links interest to CO2 e emissions reduction per unit GDP and is the first bond to link to a native forest target – a 3% increase in native forests by 2034 – paving the way for protected native biodiversity and protected areas targets. The Uruguayan SSLB has also been designed for mainstream capital markets and is underwritten by the securities arms of HSBC, Santander, J P Morgan & Credit Agricole.

Uruguay (October 2022) Issues Global Sustainability-Linked Bond, With IDB Support

Corporate Bonds of this ‘flavour’ have also been issued since 2017 from companies such as Danone, Luis Vuitton, Enel, MasMobil, Wilmar and Bunge. The lastest ‘innovation news’, the proposal from NatWest to offer a USD10 Billion Sustainability-Linked Bond to support the Brazilian Amazon target of President Luiz Lula de Silva through his ‘Amazon Fund’ builds on this progress.

There are many challenges ahead for SSLBs:

• Creating further global models with ‘bottom-up’ support from a range of political and logistical realities;
• Working back from ambitious goals so that the benefits of SLBs to Sustainable Development Goals are meaningful and supported by simple and robust grass roots linked-data;
• Incentivising highly developed nations to consider SSLBs as they already have the advantage of the lowest interest rates on sovereign debt;
• Solutions for developing nations which do not have or are near to having investment class ratings.

Clarity Coalition designed project Serious Shea Deforestation-Free, Zero-Carbon, Value Chain (The Serious Shea Project) for Africa’s Great Green Wall is working with the support of 1t.org, Uplink-World Economic Forum, the Mirova Global Sustainable Equity Fund, the US International Development Finance Corporation, other African community led projects and most recently the Delegation of the European Union to Senegal to deliver finance, investment and resources directly to municipalities where local communities have land-ownership rights (i.e. legal competence to implement solutions) and indigenous agricultural knowledge.  In addition to financial accounts, The Serious Shea Project design collects operational linked-data on blockchain in a very simple form on the ground e.g. for shea nut processing- kgs nuts, kgs waste (for fertilizer and biofuel), kwh energy and source, litres water and source, individual person name, geopoint, labour hours and income, no. and density of trees planted and protected (satellite and drone). Tree planting and protection is a critical response to climate change adaptation and desertification. Providing deforestation-free shea butter and other agro-forestry food processing will be increasingly important with the new EU regulation (November 2022) to import only deforestation-free products by 2030.

Serious Shea Project Goals are ambitious: (1) planting 1 billion trees by 2030  (2) building 200 agro-food eco-processing clusters for clean energy transition (profitable with debt financing at 4% interest rate) (3) commyunity value chain returns consistent with affording new infrastructure,  heath care plans, education & biodiversity protection. It is unlikely that these goals will be achieved without access to mainstream capital markets. There is an enormous gap in financing for the Serious Shea Project, US$20 million which is feasible in 2023 with current financing opportunities, to US$ 2.5 billion required to meet the Serious Shea contribution to  the Great Green Wall. We envisage helping to bridge this financing gap by designing ‘Municipal Sustainability-Linked Bond Indices’, including with co-operative instruments.

At this exciting 10 year turning point in a 20 year strategy The Clarity Secretariat sends enormous thanks thus far to all the individuals who offered their knowledge or relentlessly supported us and/or our projects with their time and critical contacts. In particular Dr. Malcolm MacGarvin, Lennart Englehaart, Camilla Hall, Dr Ashok Khosla, Prof. Michael Mainelli, Simon Mills, William Kwende, George Sycip, Simon Jones, Mariana Lomé, Jeff Milton, Vikki Cheung, Sylvette Peplowski, Alicia Amende, Gianluca Gygax.

Also with much appreciation and admiration to the leading role for offering the first Sovereign Sustainability-Linked Bonds of Patricio Sepulveda Carmosa, Head of Public Debt Office, Ministry of Finance, Chile, the Uruguay’s Ministry of Economy and Finance & the Inter-American Development Bank (IDB) and to all parties involved in issuing the Chilean and Uruguayan SSLBs.

Editors notes:

For the lastest information on the roll-out of Policy Performance Bonds by Z/Yen Group

https://www.zyen.com/research/research/sustainability/policy-performance-bonds/

For updates on the 1t.org, Uplink-World Economic Forum Serious Shea True Value Chain Project

https://uplink.weforum.org/uplink/s/uplink-contribution/a012o00001pTLwbAAG/seriousshea-zero-carbon-zero-deforestation-shea-value-chain

Contact: secreatariat@claritycoalition.net