Scaling credit enhancement models for sustainability-linked sovereign financing

Amid challenging financing conditions, emerging markets and developing economies (EMDEs) are struggling to access the long-term, affordable capital they urgently need to achieve the Sustainable Development Goals (SDGs). With the SDG financing gap projected to exceed US$4 trillion by 2025, countries face growing barriers to investing in climate resilience, nature protection and managing their rising debt burdens.

Against this backdrop, innovative tools are essential to de-risk investments and unlock long-term, affordable financing at scale. Sovereign sustainability-linked financing (SSLF) - including Sustainability-Linked Bonds, Sustainability-Linked Loans and Debt-for-Nature Swaps - have emerged as a promising solution. Credit enhancement instruments such as guarantees and insurance can play a critical role in scaling sustainability-linked financing for sovereigns by reducing credit risk and attracting private investment, unlocking access to additional capital for climate and nature-aligned development.

This report presents a set of recommendations and actions to scale and strengthen credit-enhanced SSLF transactions, aiming to foster market interest and advance these transactions as a distinct asset class capable of unlocking sovereign finance at scale. The proposed measures are directed at Multilateral Development Banks (MDBs), Development Finance Institutions (DFIs), Multilateral Climate Funds (MCFs), and other relevant stakeholders, who, given their institutional mandates and tools, can play a catalytic role by directly providing credit enhancement, attracting private sector investment and/or sharing technical expertise.

Recommendations include:

• Improve coordination across credit enhancement providers to scale transactions.
• Mainstream the use of guarantees in MDB and MCF institutional strategies to lower risk and attract private capital.
• Strengthen sovereign borrowers’ institutional capacity and regulatory environment to improve creditworthiness and readiness for SSLF transactions.

Why this matters: 

• Bridging sustainability and sovereign creditworthiness: By linking the cost of financing to the achievement of SDGs, SSLFs create strong incentives for governments to deliver measurable sustainable development outcomes while simultaneously improving sovereign credit profiles over time.
• Realizing financial opportunities: Estimates suggest that approximately eight countries could refinance around US$56 billion in bonds maturing over the next five years through credit-enhanced sustainability-linked loans and bonds. These transactions could generate substantial financial savings, freeing resources for SDG investments and strengthening fiscal resilience.

Demonstrating real-world impact: Recent experience in Latin America and Africa shows that sustainability-linked financing, when paired with guarantees and risk insurance, can significantly lower borrowing costs for EMDEs and unlock long-term financing needed to help close the SDG investment gap.