Chile sets a trend with first sovereign sustainability-linked bond

With its vast coastline as well as a large desert region to the north, Chile is acutely vulnerable to rising sea levels and worsening drought conditions, which have the potential to severely impact the country’s agricultural resources.

For years, Chile has moved swiftly to take on the daunting challenge of addressing climate change. In early March, the country announced its newest initiative: a first-of-its-kind, US$2 billion sustainability-linked bond offering (SLB) with two KPIs geared toward reducing emissions and increasing Chile’s use of renewable energy. BNP Paribas served as Joint Structuring Agent and Joint Bookrunner on the deal, which is the latest in a series of trailblazing sustainable finance transactions supported by the Bank in Latin America and globally.

Framework for the future

Supported by the country’s SLB framework launched earlier this year, Chile’s issuance is linked to two KPIs: a specific target for absolute greenhouse gas emissions and achieving half of electric power generation from Non-Conventional Renewable Energy sources (NCRE) over the next six years, increasing to 60% by 2032.

In the process, Chile becomes the first government to link its official Nationally Determined Contribution (NDC) commitment on climate change to a bond issuance, and one of only 11 countries to make unconditional commitments to the United Nations to reduce emissions over the next decade and beyond.

Serious about sustainability

Late last year, Chile’s Ministry of Environment published its Long-Term Climate Strategy, consolidating the various climate initiatives undertaken by the country’s different ministries, from renewable energy to sustainable mobility projects.

“In Latin America, sovereigns are finely attuned to the impact that climate change will have predominantly in emerging markets, and are proactively taking steps to support initiatives that drive sustainability and equality in their local communities,” explains Monica Hanson, Head of Official Institutions Coverage, Americas, BNP Paribas.

Since the start of the decade, Chile has presided over an estimated US$12.6 billion in multicurrency ESG bonds as part of its Sustainable Bond framework, including last year’s US$4.25 billion in cross-border green and social bonds. BNP Paribas served as Billing and Delivery Agent for the USD portion of the green and social bond offering, the largest emerging market sovereign transaction of the year. In 2019 BNP Paribas helped arrange Chile’s inaugural sovereign green bond issuance, a first within the Americas.

A ripple effect for sovereign issuers

This transaction comes on the back of the UN’s latest Intergovernmental Panel on Climate Change (IPCC) report, which pressed the urgency of having impactful sustainable development actions that bring forth innovation to fight the climate crisis. Investors responded in kind, showing strong appetite for the issuance’s innovative structure. Other sovereign issuers globally are expected to follow suit in order to finance the transition to a lower-carbon economy. 

“This trend-setting transaction is likely to garner interest from countries with similar aspirations that to date have been waiting on the sidelines,” explains Anne van Riel, Head of Sustainable Finance Capital Markets Americas, BNP Paribas. “We believe the Chilean SLB will open the market for additional sovereign sustainability arrangements going forward.”

BNP Paribas’ Peter K. Chen, Head of Official Institutions Coverage, Asia Pacific and Head of Financial Institutions Coverage, Southeast Asia, agrees that the issuance could have a ripple effect through economies worldwide, in particular across the APAC region. “With Asia’s Sovereigns warming towards sustainable bonds, this landmark SLB, paired with the significant headroom for growth in the SLB market, will help drive increased issuance of sustainable bonds by sovereigns in the APAC region,”  he explains.

Looking at the impact on issuers more broadly, Laurent Leveque, Global Head of Official Institutions Coverage, BNP Paribas, adds: “SSAs keep coming and usually have a big share of the total issuances because they’re big by nature, and often issue larger volumes than corporates. They’re clearly setting the standards for the market.”