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People and MarketsCommentLeader

Chile SLB: a new era for sovereign debt

The South America sovereign should be praised for taking first mover risk

Chile flag on the Osorno volcano, Alamy, LatAm, 575

As is the norm when any issuer takes a bold step, Chile’s plan to sell the world’s first sovereign sustainability-linked bond (SLB) woke up some naysayers. This was just an “ego trade”, said one banker — a phrase usually reserved for century bonds.

Others remain unconvinced by the sustainability-linked structure, suggesting it does not have the impact of a green or social bond.

Given the turmoil in financial markets, there are no guarantees that Chile’s deal will go well. Maybe the new issue concession will be extortionate, maybe the size won’t be as large as it would like, maybe some investors will be too preoccupied with Ukraine to give a new format the attention it requires.

This is of little importance versus the potentially transformational impact of Chile’s deal, however. Chile is a sophisticated and experienced issuer with strong credit metrics — whatever happens with its next trade, it will survive and thrive. Of far more relevance is that, however the deal is received, Chile deserves applause for an exceedingly bold move that could herald a new era for sovereign debt.

Here is an issuer that has already issued a staggering $31bn of green, social and sustainable bonds. Adding an SLB to Chile’s debt is not about ego, it’s about adding another layer of complexity to the country’s sustainability commitment. Uruguay’s highly regarded debt management unit has been working on the idea for well over two years and is still yet to emerge with a deal — if this were certainly an easy option for some free publicity, Chile would not have been the first.

Companies do sustainability-linked finance to put skin in the game of their transition into a more sustainable entity. The same principle applies to Chile’s proposed SLB — it is nailing the country’s colours to the sustainability mask. Yet, if anything, this is a more powerful statement than a corporate SLB.

First of all, the sustainability performance targets in the bond will tie Chile to its environmental commitments no matter who is in office — something that cannot be said of green or social bonds issued by sovereigns. Moreover, politicians are public figures in a way that corporate financiers are not. Their reputation is at stake — there would be potential for social uproar if a politician’s environmental negligence were to lead to higher interest costs for a country.

It would have been quite easy for Chile to keep notching impressive numbers of sustainable bonds; it knows the process off-by-heart these days. With its SLB, Chile is taking both political and market risks, replacing rhetoric with action. This makes the deal a potentially powerful statement, and should be a model to follow in sovereign debt.