Examining emerging markets: Chile opening new frontiers with SLBs

August 31, 2023

Emerging market debt expert Jana Harvey, BlueBay Senior Portfolio Manager, discusses Chile’s ongoing commitment to environmental, social and governance (ESG) with the addition of social targets and why it matters.

Chile’s continuing commitment

Last year, Chile successfully launched the first ever sovereign sustainability-linked bond (SLB) with a step-up coupon structure, with Uruguay following shortly afterwards with another innovative step-up-step-down SLB structure. SLBs are a product first launched in 2019 in the corporate space by Enel, an Italian multinational manufacturer and distributor of electricity and gas.

Following a sharp increase in issuance in 2021, its popularity waned somewhat since, with issues around appropriate pricing models, unambitious targets, small penalties as well as lack of price advantage in the primary market. This held both issuers and investors back from fully embracing the concept. Presently, with USD 216 billion of SLB bonds outstanding globally [source HSBC, as of 10th July 2023], the SLB market remains the smallest part of the ESG-labelled bond universe. Yet, we believe it remains an area to watch.

These structures open up a new instrument for countries that may not have enough projects for ‘use-of-proceeds’ bonds but still want to attract ESG-minded capital. They could also serve as a powerful tool to hold countries accountable for meeting their ESG commitments, such as the presently non-legally binding Nationally Determined Contributions (NDCs) under the Paris Agreement, helping to reduce risks that future administrations will backtrack on commitments, by making non-adherence costly. Furthering its leadership in this field, Chile has continued to showcase its commitment to environmental and now also social objectives by issuing a dual-tranche $ and single-tranche EUR SLB bonds at the end of June, opening up new frontiers for sovereigns within sustainable finance.

Chile adds a social target to new SLB issuance

Similarly to previous issuances, the new SLB bonds are offering investors a step-up coupon of various sizes from 2030/31 onwards, should Chile not adhere to a range of key performance indicators such as:

  • commitments to the reduction of greenhouse gas emissions
  • an increased share of renewable energy in the national electric system

This time, however, the country has expanded the original framework to include a new 3rd key performance indicator covering the ‘S’ in ESG. This social element targets an increased percentage of women on the boards of companies subject to the oversight of the Financial Market Commission (local markets regulator), at 40% from a 14% baseline in 2022. The introduction of a social KPI is yet another ‘first’ in the area of sovereign SLBs, where, until now, KPIs have been dominated by environmental goals.

Innovative liability management

This transaction was even more meaningful given the long-dated nature of the issuance (including bonds maturing in 2054) as well as the connected liability management exercise, which offered holders of Chile’s plain vanilla sovereign bonds to exchange these for the new SLB-linked instruments. This move thus further increases Chile’s ESG-labelled bond debt stock, which is already one of the largest amongst its sovereign peers worldwide, amounting to 31% of total debt outstanding (third after Andorra and Hong Kong), before this latest tranche, with the ultimate goal of a 50% share of ESG bonds in its public debt stock. The transaction, along with the liability management exercise, further shows Chile’s commitment to improving its environmental and social performance, as well as the confidence of the sovereign in fulfilling these ambitious objectives.

A meaningful direction

ESG-labelled bonds present an important channel for emerging markets to raise much needed sums to fund investments bringing them closer to achieving important ESG objectives, such as the Sustainable Development Goals and NDCs. With the rise in demand for ESG-minded investments, we predict more countries will come to the market over the next 12 months with the intention to issue an ESG-labelled bond. While ‘use of proceeds’ bonds will be the natural first choice for many, we suggest the SLB concept should be seriously considered.

We believe these innovative instruments are a unique opportunity for countries to showcase to investors their commitments to improve their environmental, social and governance characteristics, tying their future cost of funding to the fulfilment of their goals – instruments suitable to both emerging and developed markets alike. The embrace of the concept shouldn’t be hindered by some of the obstacles mentioned above, which the market will eventually work its way through. We hope other countries will follow the emerging market pioneers, Chile and Uruguay, on this path towards a more sustainable future.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.

This document is a marketing communication and it may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (BBFM S.A.), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany, Italy, Spain and Netherlands the BBFM S.A is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by RBC Global Asset Management (UK) Limited (RBC GAM UK), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts at the registered office of the Swiss representative or at the registered office or place of residence of the investor shall have jurisdiction pertaining to claims in connection with the offering and/or advertising of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), the Packaged Retail and Insurance-based Investment Products - Key Information Documents (PRIIPs KID), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Asia, by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong. In Australia, RBC GAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. RBC GAM UK is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits RBC GAM UK to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. In the United States, by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. The entities noted above are collectively referred to as “RBC BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of RBC BlueBay by the respective licensing or registering authorities. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only, due to local regulatory and legal requirements.

This document is intended only for “Professional Clients” and “Eligible Counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) or the FCA); or in Switzerland for “Qualified Investors”, as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by “Accredited Investors” (as defined in the Securities Act of 1933) or “Qualified Purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer.

Unless otherwise stated, all data has been sourced by RBC BlueBay. To the best of RBC BlueBay’s knowledge and belief this document is true and accurate at the date hereof. RBC BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. RBC BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only.

No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of RBC BlueBay. Copyright 2023 © RBC BlueBay. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management Inc., RBC Global Asset Management (UK) Limited and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated corporate entities. ® / Registered trademark(s) of Royal Bank of Canada and BlueBay Asset Management (Services) Ltd. Used under licence. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. RBC Global Asset Management (UK) Limited, registered office 100 Bishopsgate, London EC2N 4AA, registered in England and Wales number 03647343. All rights reserved.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.