Slovenia to Link Debt Costs to Climate Goals in First for Europe

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(Bloomberg) — Slovenia moved a step closer to linking some of its borrowing costs to the achievement of climate goals, which would be the first ever by a nation in the European Union.

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The government led by Premier Robert Golob approved the framework for a so-called sustainability-linked bond on Thursday, which will tie the interest rate the state pays to whether it meets pre-determined environmental, social or governance (ESG) targets. So far, only a few countries such as Chile and Uruguay have issued such sovereign debt.

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While most SLBs only have what is known as a “step-up” coupon, which penalizes borrowers for failing to meet the set objectives, Slovenia also plans a rarer “step-down” coupon that would reward the nation if it outperforms certain environmental goals. Uruguay used a similar mechanism in 2022. 

If Slovenia achieves a reduction of 2030 total annual greenhouse gas emissions by at least 45% compared to 2005, it would lower the coupon interest rate by about 10 to 15 basis points per year from 2033 until maturity. On the other hand, if it fails to meet a 35% reduction goal, it would have to pay a similar financial penalty.

Other potential targets proposed by Slovenia are for total energy consumption, share of renewables in overall final energy consumption, and more ambitious greenhouse emission reduction goals by the end of 2033. 

SLB Market

The eurozone nation will likely opt for a 10-year maturity, with the aim of raising up to €1.5 billion ($1.6 billion). 

“We expect to issue the sustainability-linked bond sometime in June, depending on market conditions,” Marjan Divjak, the head of Slovenian Treasury, told Bloomberg.

Slovenia’s debut could provide a boost to the broader market for SLBs. Global sales fell to $38 billion in 2024 from $70 billion a year earlier, according to Bloomberg Intelligence data. 

After rapid growth in corporate use in earlier years, the market is now looking to tighten standards to avoid greenwashing accusations, with some deals having been criticized for unambitious targets and weak penalties. Meanwhile, governments have been slow to adopt the bond format. 

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