Insights from Thailand’s issuance of sovereign sustainability-linked bonds

THAILAND’S launch of a 30 billion Thai baht (S$1.2 billion) sustainability-linked bond (SLB) marks a notable advancement in the sovereign-labelled debt market. While some corporate SLBs have faced allegations of greenwashing and investor scepticism about enforceability and impact, if managed appropriately, sovereign SLBs could offer a viable alternative for developing countries to finance national sustainability strategies.

SLBs are distinctive in that they link the bond’s coupon to the achievement of specific environmental, social or governance targets.

This “carrot-and-stick” approach can be an effective way to incentivise sustainable practices. Thailand’s issuance will be the first sovereign SLB in Asia and the first non-South American sovereign SLB to come to market. Additionally, issuing in the Thai currency will bolster local capital-market development, although it may limit participation of certain international investors.

Thailand’s SLB includes a step-up and step-down mechanism tied to two sustainability performance targets (SPTs). If the government fails to meet its targets, the bond’s coupon rate will increase, raising borrowing costs. Conversely, if the country meets these targets, the coupon rate may decrease, rewarding progress. The bond has a tenor of about 16 years with a coupon rate of 2.7 per cent paid semi-annually.

Corporate SLBs have frequently faced criticism for having poorly defined or unambitious key performance indicators (KPIs) and inadequate penalties for non-compliance. Conversely, due to their public nature, transparency requirements and links to broader developmental goals, sovereign SLBs may offer greater credibility to this financing model.

Thailand’s issuance will serve as a case study and, depending on its reception and performance, may encourage other Asian countries to pursue similar sovereign bonds as part of their national sustainable financing strategies.

Growing role in developing countries

Thailand’s venture into SLBs comes at a critical juncture for global climate finance. The country has pledged to reduce its greenhouse gas emissions by 40 per cent by 2030 and achieve net zero by 2065.

By aligning its SLB to these overarching goals, Thailand not only enhances its credibility but also offers investors a clearer understanding of the bond’s impact. Moreover, as a sovereign issuer, the country is better positioned to implement systemic changes, such as incentivising green industries and creating a supportive policy environment, compared to individual corporate entities.

Between 2020 and 2022, Thailand also issued two sustainability bonds totalling 377 billion Thai baht, based on data from the country’s Public Debt Management Office. Proceeds of these bonds were used to fund projects such as enhancing the country’s clean transportation efforts and addressing the social impacts of Covid-19. 

The global landscape for sovereign SLBs is gaining momentum. Chile and Uruguay set early benchmarks with their SLB issuances. Chile’s issuance in 2022 tied interest payments to reductions in greenhouse gas emissions, while Uruguay’s SLB linked coupon adjustments to national targets for carbon emissions and forest cover.

Meanwhile, Slovenia, Mongolia and South Africa are exploring similar issuances, demonstrating a growing appetite among developing nations to leverage SLBs for national sustainability objectives.

For these countries, SLBs represent more than an innovative financing tool; they are a pragmatic solution to the urgent need for sustainable development funding.

Developing economies face significant barriers in accessing climate finance, as international aid and concessional loans often fall short in terms of scale and favourable financing conditions.

SLBs enable these countries to tap global capital markets while committing to measurable outcomes, thus aligning their fiscal strategies with global climate goals.

However, sovereign SLBs are not without risks. They must overcome the same credibility challenges as corporate SLBs, including concerns about the robustness of KPIs and the enforcement of penalties for missed targets. 2025 is set to be a landmark year for the assessment of SLBs’ integrity with nearly 100 SLBs worth US$70 billion, in Sustainable Fitch’s universe, due for SPT observation.

Additionally, governments must ensure that these bonds do not disproportionately shift the financial burden of not achieving SPTs onto the public, since borrowing costs would then rise. This is particularly the case in economies with limited fiscal headroom. Therefore, commitment to achieving these targets is paramount.

Thailand’s SLB will be a chance for sovereign issuers to redefine the narrative around this instrument. If successful, it could pave the way for broader uptake, encouraging both developed and developing countries to integrate sustainability-linked mechanisms into their financing strategies.

By doing so, sovereign SLBs could become a key tool to bridge the climate finance gap and help emerging economies pursue sustainable development.

The writer is an analyst with Sustainable Fitch, a division of the Fitch Group