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27 April 2023

Measuring climate ambition

Reporter at Uxolo
Climate finance, Finance and other
Chile and Uruguay’s pathfinder sovereign SLBs are inspiring other countries to consider their own SLB debut. But as the instrument gains popularity, it will be vital to assure investors that issuers’ enabling environments and climate ambition are concrete enough to achieve their KPIs.

Climate ambition refers to the level of commitment and action taken by a given actor to mitigate and adapt to climate change. Following the launch of sovereign sustainability-linked bonds (SLBs), markets are increasingly looking to the term as a key indicator of whether a sovereign issuer can reliably hit KPI targets and deliver on climate promises.

For countries, climate ambition is measured by the Nationally Determined Contributions (NDCs) submitted under the United Nations Framework Convention on Climate Change (UNFCCC). These NDCs outline the specific targets and actions a country plans to take to reduce its emissions and adapt to the impacts of climate change.

The introduction of sovereign SLBs to the market has, arguably, changed the game for financing NDC pathways. As recently covered by Uxolo, ‘reporting to the United Nations is a costly exercise which requires extensive national resources and personal commitments, and it does not offer a reward’. But SLBs, which offer step-up or step-down interest rate mechanisms based on the achievement of predefined NDC-related KPIs, can provide a monetary incentive for countries to invest in building capacity to accurately measure and report on their progress.

The sovereign SLB market is in its infancy. Chile and Uruguay are the first and only countries to have issued them. In March 2022, Chile raised $2 billion in its 20-year SLB with a 4.436% coupon which will step up by 25bp if key-performance indicator (KPI) targets are not met. In October 2022, Uruguay raised $1.5 billion in a 12-year issuance, with a 5.75% coupon set to increase by 15bp if KPIs are not met and conversely decrease by 15bp if they are.

Two deals does not a market make, but those two deals are set to be mirrored by other countries, and potentially fairly quickly given market rumour suggests that the Netherlands, Brazil and Rwanda are all considering SLB issues. As the instrument gains popularity, it will be vital to assure investors that issuers’ enabling environments and climate ambition are concrete enough to achieve their KPIs.

The market has yet to develop a reliable industry standard for defining and measuring climate ambition. There is no universally coherent way to assess sovereign debt from a climate change perspective, aside from some existing tools that are paid for services and only consider some aspects of climate risk. “Any paid index is usually opaque, so it is not clear to the investor what exact action points a given country is doing well on”, says Antonina Scheer, policy fellow at Grantham Research Institute on Climate Change & the Environment (GRI), “and if you aggregate many different aspects of climate risk, you lose colour and understanding”.

Efforts are underway to develop standardisation. The team behind the UN Principles for Responsible Investment are developing the Assessing Sovereign Climate-Related Opportunities and Risks (ASCOR) project alongside academic partners including GRI, the Transition Pathway Initiative and LSE. ASCOR aims to be the first publicly available, independent, and open-source investor framework and database assessing the climate action and alignment of sovereign bond issuers, gathering and standardising the data and indicators necessary for measuring ambition for investors. The final report, following assessments and feedback from 25 pilot countries, is due in Q4 2023.

Countries included in the piloting of the ASCOR framework 





South Africa










United Kingdom





United States




Saudi Arabia



Pillars for measuring climate ambition will centre on emission pathways, climate policies, and climate risks and opportunities to finance the transition. One of the project’s most important design features is the exemption of middle and low income countries on several indicators judged to be inappropriate for its aims – for example, low-income countries are not assessed on any indicators relating to carbon pricing – in order to prevent them being labelled as underperforming, “when the real mitigation burden should prioritise high income countries which have much higher emissions per capita”, says Scheer.

The project aims to increase transparency between issuers and investors and provide a win-win tool for both parties. A reliable, comparative framework will comfort investors that the enabling environment within an issuing country is suitable for it to meet its KPIs, and optimistically increase available capital. Even countries with poor sustainability track records could increase their green fiscal belts with SLBs, so long as investors were comfortable that targets were achievable.

As Claudia Gollmeier, managing director (Singapore) at Colchester Global Investors and acting co-chair of the ASCOR project, outlines: “As more countries use labelled bonds to finance the transition, it is necessary for investors to have independent indicators to assess how governments align with their transition pathways and to track their progress”.

The project has also offered a rare opportunity for debt management offices (DMOs) to directly communicate about climate ambition. Esther Law, one of the project’s acting co-chairs and senior investment manager in emerging market debt at Amundi, says that in the roundtables “DMOs which have already been issuing green bonds before are naturally more aware of our framework and have more feedback – whereas the newcomers tend to be quieter, absorbing the information and getting interested”.

DMOs will hold significant sway in the energy transition due to their influence on purse-strings, and according to an MDB source, will play a significant role in the climate transition of countries within Latin America and Asia. “Right now, the region is over-indebted, and the mandate for project design is to find money at the lowest cost possible, whereas some of these green tech products require lots of reporting,” says the source. The MDB’s goal is to “create a financial incentive for that'', encouraging DMOs to tell them “‘hey, I want to access cheaper debt – can you help me increase the climate and biodiversity transparency of my policies?’.”

Beyond SLBs, there are other financial mechanisms in the works that could further bolster countries’ motivations to invest in improving their climate ambition. One such example is an interest rate mechanism linked to climate ambition, within which MDBs will offer cheaper financing even below typical development rates for sovereigns that achieve certain targets. In order to avoid destabilising triple-A ratings, the pilot currently under discussion will entail technical assistance being provided initially, followed by a conditional grant upon achievement of results. A strong motivation behind the plan is to make the connection clear between the financial incentive of the grant and how much climate ambition can be achieved in a certain sector.

The Uxolo perspective

As Uxolo recently reported, creating a sovereign SLB is an intense task, requiring extensive coordination with the respective countries’ DMOs and environmental ministries at the very least. The process requires massive capacity strengthening in transparency and reporting in order to define and keep track of the KPIs, and to assure DMOs that avoiding the step-up/ achieving the step-down is possible. However, such capacity building is essential for facilitating holistic, effective sustainability progress – and with SLBs that process has a clear financial incentive.

While concerns remain that SLBs will not be suitable for all sovereigns, particularly those in debt crises, proactive initiatives like ASCOR will be able to ensure investors and issuers that they are working off the same dataset.

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