Drought-Riven Chile Makes World First in Environmental Bonds

(Bloomberg) -- Chile issued bonds tied to sustainability goals, the first nation in the world to do so, as the country wracked by a decade-long drought looks to cut greenhouse gas emissions, and obtain cheap financing.

The government sold $2 billion in dollar-denominated, sustainability-linked bonds maturing in 20 years, according to a person with knowledge of the matter. The offering yields 2 percentage points above Treasuries after initial discussions in the area of 2.4 percentage points, said the person, who asked not to be identified as the details are private.

Chile's government is already the biggest issuer of environmental, social and governance bonds in Latin America, with $31 billion in sales, and is now looking to boost its green credentials still further. The sustainability-linked bonds pay a set penalty to investors if the seller fails to meet certain targets -- in this case tied on greenhouse gas emissions and renewable energy generation.

The interest rate payable on the notes will be increased by either 12.50 or 25 basis points unless Chile meets its ESG goals, the person said.

The SLB offering completed the sale of $2 billion in ESG bonds the country had planned to issue last month, adding to the $4 billion raised in that format already this year. That would conclude this year's $6 billion external markets issuance target, Cristobal Gamboni, head of the Finance Ministry's newly created Green Finance Office, said in a February interview.

The deal is already getting strong investor demand, Gamboni said in a written response to questions Wednesday. Chile might end up issuing less debt than projected this year as the nation has raised $5 billion more than expected in revenue, he added.

Booming Market

Sustainability-linked debt is one of the fastest-growing subsets of ESG debt. Global sales of the so-called SLBs hit a record $110 billion last year, compared with $11 billion issued in 2020, according to data compiled by Bloomberg. Moody's ESG Solutions is forecasting issuance of the debt to reach $200 billion this year.

SLBs are growing in global popularity because they can be used by a wider pool of borrowers, including those without big environmental projects, allowing them to tap a growing ethical fund industry and get cheaper borrowing costs.

Read more: Borrowers Embrace Bonds That Ensure Against Betrayal of ESG Vows

Yet sovereigns have been slow to enter the market, partly due to problems setting trackable ESG goals known as key performance indicators, given the governance processes required, according to Nathalie Larrouse, climate and ESG capital markets Director at NatWest Markets. Chile's SLBs are the first from a nation, according to data compiled by Bloomberg.

“With the improvement of data and experiences drawn from the corporate sector, we see an interesting future for SLBs in the sovereign space, particularly in the emerging markets,” said Larrouse.

Chile has been suffering from a drought for more than a decade as the northern desert expands ever further south in a move linked by many to global warming, adding to pressure on the government to take action over greenhouse gas emissions. In the last decade, there has been an explosion in the use of solar panels and wind farms as the government sets new emission targets.

BNP Paribas SA, Credit Agricole CIB, and Societe Generale managed the bond sale, the person said.