Scaling sustainable sovereign debt

The sustainable sovereign debt market is gaining momentum, driven by a growing demand for financial solutions that link economic growth with environmental, social, and nature-positive outcomes, writes Barbara Oldani

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The landscape of sustainable sovereign debt is evolving and, with it, the institutions leading the charge. The Sustainability-linked Sovereign Debt Hub has now rebranded as the Sustainable Sovereign Debt Hub (SSDH) reflecting its broader focus beyond sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs).

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Due to constant innovation, what began as an initiative to scale up the market for these specific instruments has expanded to include a wider array of financial tools and debt management strategies to enhance resilience for emerging markets and developing economies (EMDEs).

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This evolution reflects the concept that nature/environmental sustainability and fiscal stability must be addressed together. A country's ability to function effectively in the long term depends on balancing financial health with responsible resource use—ensuring that neither social well-being nor economic growth comes at the expense of future generations.

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Expanding access to GSSS+ markets

Green, Social, Sustainability, Sustainability-linked, and other innovative sovereign debt instruments (GSSS+), such as impact or outcome bonds, allow governments to implement structured, resilient debt management strategies while driving sustainable economic growth.

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This market is going through significant development, with several innovative examples emerging lately.

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One notable transaction was Thailand's issuance of its first sovereign sustainability-linked local currency bond in December 2024, marking Asia's entry into the sovereign SLB market; another significant deal is the Inter-American Development Bank's (IADB) Amazon Reforestation Bond, directly tied to reforestation outcomes, the biggest 'outcome bond' issued so far.

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Côte d'Ivoire's first Debt-for-Development Swap, supported by the World Bank, linking debt issuance to key performance indicators in education, demonstrates how performance-linked financial instruments can be leveraged to support social and environmental objectives.

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It is encouraging to see, through these examples, the increasing sophistication of performance-linked sovereign debt and its potential to drive positive change.

It is also encouraging to see the growing number of conversations on this topic – including just earlier this year at the OECD Community of Practice on Private Finance for Sustainable Development (CoP-PF4SD) Conference 2025.

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Strengthening credit enhancement for sustainability-linked sovereign financing

The SDDH-led Taskforce on Credit Enhancement for Sustainability-linked Sovereign Financing recently celebrated its one-year anniversary. With the release of the Voluntary Principles for the Deployment of Credit Enhancements (available at creditenhancement.org), the Taskforce aims to scale up credit enhancements in sovereign sustainability financing—such as for GSSS+ bonds for lower-rated countries—helping issuers secure better financial terms and support progress toward sustainable development goals.

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The principles focus on four key areas to improve access to, and affordability of, credit enhancements:

1. ensuring mechanisms are suitable to a country's economic context,
2. pursuing ambitious climate and nature-related goals,
3. maintaining strong governance through credible reporting, and
4. upholding transparency and accountability in transactions.

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Unlocking opportunities for private sector and donor participation

While multilateral development banks (MDBs) and development finance institutions (DFIs) play a key role in de-risking these transactions, the private sector and philanthropic donors also have significant opportunities to contribute in multiple ways, such as:

• Technical assistance grants – Enhancing project viability and borrower capacity;
• Credit enhancement – Providing guarantees or insurance to lower financing costs;
• Blended finance structures – Offering below-market-rate capital to attract private investors;
• Early-stage design grants – Supporting innovative financial models;
• Concessional debt – Reducing investment risk and leveraging additional capital.
• By actively contributing to the financial structure of bonds, for example in outcome bonds structures by providing the success payment, or committing to purchase possible carbon or nature credits generated, supplementing or replacing interest payments.
• Supporting further standardization – for example financing taxonomies or template frameworks development.

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Recent innovative models of private-public risk sharing

A meaningful example of donor-private collaboration is the Bahamas' 2024 debt-for nature swap. This $300 million transaction combined debt restructuring with marine

conservation efforts and was backed by a $200 million partial credit guarantee from the Inter-American Development Bank, a $70 million collateralised guarantee from Builders Vision, and $30 million in credit insurance from AXA XL. It marked the first time private sector guarantees and insurance were used at scale, setting a replicable precedent for other small island developing states seeking to advance both environmental protection and fiscal sustainability.

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Standardisation: the key to scaling GSSS+ markets?

Notwithstanding that, especially for nature key performance indicators (KPIs), every country context is different, to further accelerate the organic growth of GSSS+ markets developing standardized formats of KPI frameworks and taxonomies is important.

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These tools provide investors with reference benchmarks and more data points – ensuring transparency and accountability in impact measurement while making it easier for governments to structure sustainability-linked debt. More standardization in sovereign KPIs, especially for climate transition and adaptation, should be supported.

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Looking ahead

The sustainable sovereign debt market is gaining momentum, driven by a growing demand for financial solutions that link economic growth with environmental, social, and nature-positive outcomes.

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As the market grows, partnerships among governments, MDBs, donors, and investors are turning sustainability-linked sovereign debt into a driver of inclusive, long-term growth. Let's keep it going!

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