By issuing Europe’s first sovereign sustainability-linked bond this week, Slovenia has cemented its status as one of the continent’s most innovative and far-sighted countries.
It deserves that reputation not just as a bond issuer, because the essence of an SLB is performance in real life. Slovenia has committed to lowering its greenhouse gas emissions, not counting land use, 35% from 2005 to 2030.
That is a national target, carefully undertaken, and was not driven by the bond. But the €1bn 10 year note it issued this week has carved the target into the public consciousness by promising a financial forfeit if Slovenia misses it.
The actual sum is small — a 50bp step-up on the last 3.125% coupon, which would cost €5m. That is just a 1.6% increase in the total interest bill for the bond over 10 years of €312.5m.
Scholars of SLBs have fretted about whether the coupon step-ups offered are big enough to act as material incentives for issuers to hit their targets — or for investors to find value in the instrument.
But, especially in the sovereign context, that misses the point. By issuing the SLB, Slovenia has made that 35% target a public issue, a market issue and a political issue.
Whether it scrapes through to hit the target, sails past it or fails, people will notice, and the heat will be on the government.
Some supporters believe SLBs can help to hold governments to their sustainability promises, even when the ruling politicians change.
That may work. Equally, the SLB could become a punchbag for the opposition or a new government, a political provocation. But either way, the SLB will ensure there is lots of attention. That in itself sharpens the need to plan well, deliver and hit the target.
The purpose of sustainable finance is communication — to inform investors and other stakeholders, in a verifiable way, of the issuer’s actions towards a greener and more socially just future.
For governments wanting to communicate financially that they are committed to sustainability, there is no clearer way than an SLB.
Slovenia has shown other European countries how to tell the world that when they set a sustainability goal, they mean it.