Structuring bonds for climate-linked returns

Barbados has launched the world’s first debt-for-climate-resilience operation, generating US$125 million in fiscal savings aimed at enhancing water and sewage projects resilient to climate change. The model addresses both debt constraints and climate emergencies simultaneously, serving as a powerful example of #blendedfinance in action. Blended finance strategically uses public or philanthropic capital to attract private investment for projects with social or environmental impact. In this case, the collaboration includes the Inter-American Development Bank (IDB), European Investment Bank (EIB), and Green Climate Fund (GCF). Together, they've helped Barbados swap high-cost debt for more affordable financing. The loan is structured as a Sovereign Sustainability-Linked Loan (SSLL), with penalties for missed targets that will be reinvested in environmental initiatives. Prime Minister Mia Amor Mottley stated, “In the face of the climate crisis, this groundbreaking transaction serves as a model for vulnerable states, delivering rapid adaptation benefits for Barbados.” This isn't just a financial move; it symbolises optimism and resilience for developing nations facing similar circumstances. By focusing on climate adaptation, strategic partnerships can create win-win solutions for both the environment and local communities. For more information, see the original article below.

Denmark as a leader in sustainable finance? Denmark will issue a 10-year European Green Government Bond in the second half of 2025, becoming the first sovereign issuer under the EU Green Bond Standard. Proceeds, with an issuance volume of up to DKK 10 billion in 2025, will be directed towards government green expenditures in areas such as energy transition, sustainable transport, agricultural land conversion, and nature restoration. The bond has a twin-bond structure that helps preserve liquidity and gives investors flexibility, though demand will be tested in practice. The bond will be structured as a twin bond to the existing 10-year conventional government bond (DGB 2.25% 2035), ensuring liquidity and investor flexibility. An external review by Sustainable Fitch confirmed alignment with both ICMA’s Green Bond Principles and the European Green Bond Standard. Denmark commits to continued allocation and impact reporting to demonstrate the climate benefits of the issuance. With this Denmark can use reporting not just for accountability but to showcase tangible climate progress, setting itself apart. Clear, impact-driven reporting will be key to showing real climate outcomes and building credibility — this may bring new approaches to green bond initiatives. The DKK 10 billion is cautious but signals commitment; larger volumes could follow once the framework is established. Now, can other EU states can learn from Denmark’s approach to compliance, transparency, and market structuring?

New Research: Integrating Climate Commitments into Sovereign Bond Investments I'm happy to share my latest paper, From Pledges to Portfolios: Integrating Countries’ Climate Commitments into Sovereign Bond Investments, now available on SSRN. This joint research with Fabio Alessandrini and Lou-Salomé Vallée explores how investors can align sovereign bond portfolios with climate goals by incorporating Nationally Determined Contributions (NDCs), the climate commitments made by countries under the Paris Agreement. 🔍 Key Insights: 1- Traditional net-zero (NZ) strategies for sovereign bonds often rely on historical carbon emissions, ignoring countries’ planned climate efforts. Our study introduces an alternative approach: using NDCs to guide portfolio allocation. 2- Looking back (2015–2021), we find that NDC-based portfolios achieve significant emissions reductions with lower financial disruptions (i.e., reduced tracking error) compared to strategies assuming constant emission intensities. 3- Looking forward (2021–2030), the second wave of NDCs, announced before COP26, allows for even greater greenhouse gas (GHG) reductions at minimal financial cost, making them a powerful tool for investors aiming to decarbonize portfolios. 4- However, there's a trade-off: strict investment constraints to maintain regional or country-specific allocations can limit the effectiveness of decarbonization efforts. Striking the right balance between climate ambition and financial feasibility remains a key challenge. Our findings highlight the potential of NDCs as a forward-looking, pragmatic solution for investors seeking to integrate climate risk into sovereign bond portfolios without sacrificing financial performance. 📄 Read the full paper here: https://lnkd.in/ekqr4uJ5 #ClimateFinance #NetZeroInvesting #SovereignBonds #SustainableInvesting #ESG #FinanceResearch HEC Lausanne - The Faculty of Business and Economics of the University of Lausanne Center for Risk Management - Lausanne

Contingent resilience-linked (CORL) bonds. Last week, Jamie Dimon, CEO of J.P. Morgan, was calling for a greater collaboration between public and private capital to adapt to the physical challenges we are facing, so we spent the weekend (*) thinking hard about it. The resulting proposal, #CORL bonds, (https://lnkd.in/dqhqp2jD) blends public capital into “traditional” sustainability-linked bond private capital structures. In principle, a CORL bond is an SLB with step-down, that has the fixed coupon at the same level as a traditional bond and get to this pricing through some contingent credit enhancement (otherwise the no-arbitrage condition would start making a fuzz). In one of the examples, we show that an issuer that would fund at a BB level, 7.25%, with a vanilla bond, could print a CORL bond with a fixed 7.25% coupon, and a possible 1.25% stepdown if they reach some resilience target, if a public source (such as a development finance institution, DFI) provides a modest amount of credit enhancement in the step-down scenario. Importantly, the analysis/calibration is designed to facilitate that private capital investors would/should be more than happy to provide the capital for that transaction. The upside for the DFI is that this is a relatively efficient way to use capital: just credit enhancing structures one or a few notches, and only doing so if the issuer plans seriously for environmental resilience (mitigating potential future exposure losses for the DFI). This is work from Anthropocene Fixed Income Institute and United Nations Office for Disaster Risk Reduction (UNDRR) Investment Advisory Board. Potential to discuss this in person in Oxford, London, Stockholm, Paris, Vienna and Dubai (#COP28) in the next two months. Reach out if of interest. #fixedincome #esginvesting #resilience (*) Clear understatement, in the spirit of this website.