Sovereigns and Sustainable Bonds: Challenges and New Options

Abstract

gong cheng torsten ehlers frank packer gong.cheng@bis.org tehlers@imf.org frank.packer@bis.org sovereigns and sustainable bonds: challenges and new options1 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. jel classification: h63, o16, q01, q50. the market for green, social and sustainability (gss) bonds2 has grown rapidly since its inception, to around $2.9 trillion outstanding by end-june 2022.3 the funds raised for gss bonds are earmarked for eligible projects: climate and environmental projects in the case of green bonds; projects related to health and education, affordable housing or food security for social bonds; and a mixture of green and social projects in the case of sustainability bonds. in contrast to conventional bond markets, sovereign issuers were latecomers to the gss market, but have …

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