Governments hold a crucial role in shaping and facilitating national transitions to a low carbon and socially equitable economy given the breadth and scale of their mandates, as well as their power to catalyse private sector action. Sovereign impact bonds are a key tool that governments can leverage to finance the implementation of national climate and social development action plans and to support international cooperation efforts. Issuance of sovereign impact bonds has boomed in recent years and we expect this trend to continue (if not accelerate). By investing in sovereign impact bonds investors have the opportunity to back the delivery of ambitious and credible national decarbonization and development strategies. However, assessing the impact of sovereign issuance comes with a unique set of challenges. In this insight piece we outline our approach to critically select sovereign impact frameworks that can deliver material positive externalities.

Sovereign green bond issuance has boomed since its inception in 2016, with a growing number of countries looking to access impact bond markets to support their policies and infrastructure programs aimed at advancing national climate objectives. According to market data[1], 34 national governments have issued sovereign impact bonds under one sovereign impact bond framework since market inception. While green bond frameworks are the most frequent sovereign framework type (61% by count), the share of sustainability and social sovereign frameworks (as well as bonds) has been increasing since 2020 and currently makes up 31% and 8% of the total number of published sovereign impact frameworks, respectively. This increased focus on integrating social spend into sovereign impact bond frameworks has in part been driven by government efforts to support the recovery from the covid-19 pandemic.

Sovereign impact bond issuance between January and end of September 2021 reached a record high of USD 75 billion[2],  with issuers spanning both developed and emerging markets. This year has already seen debut issuances from seven countries, including Italy, Malaysia, Andorra, Slovenia, Benin, Spain and the United Kingdom, as well as from the European Union.

This momentum coincides with the run up to the UN climate conference (COP26), as countries look to signal strengthened climate targets as part of the first Nationally Determined Contribution (NDC) update cycle. The sovereign impact bond market also represents a key opportunity for countries to fund their green recovery plans. The EU’s EUR250 billion NextGenerationEU green bond programme, with its first issuance launched in October, is a case in point. The programme aims to support Member States’ recovery interventions and expenditures that tangibly contribute to the block’s climate and environmental targets.


With the pipeline of new and repeat sovereign issuers expected to keep expanding throughout the rest of the year and beyond, it is important for investors to be able to effectively assess the positive impact opportunities and risks related to financing sovereign impact bonds. Building on our last insight piece on sovereign issuance published back in 2018[3], this commentary provides an overview of how we assess sovereign impact bond issuance.

Applying our SPECTRUM Bond® criteria to sovereign impact bonds

We apply our proprietary SPECTRUM Bond® framework to verify whether impact bonds are eligible for inclusion in our investable universe. Our verification process follows the same structure for all issuer types which incorporates sustainability and credit assessment along with ESG criteria at both the issuer and framework level. However, we apply specific evaluation criteria for sovereign issuers to effectively account for their unique characteristics.

A key differentiator between national governments and other issuer types is that a government’s remit provides access to a much greater breadth and scale of sustainability-related investments. Due to this characteristic, sovereign impact bond frameworks typically present a remarkably broad set of eligible use of proceeds. The extensive scope of a sovereign’s mandate highlights the potential to deliver wide-ranging sustainability benefits, including in areas that don’t usually fall under the remit of corporate issuers and/or have received limited attention in the impact bond market to date, such as biodiversity and climate adaptation.

However, the lack of granularity that often accompanies eligible categories within sovereign impact bond frameworks poses challenges to determining specific activities and project types being funded, as well as to assessing the materiality of positive impacts expected to be delivered by the framework. When eligible categories are only defined at a high-level, comprehensive exclusion lists can provide critical reassurance that controversial project will not be eligible. The inclusion of specific and representative examples of eligible expenditure programmes can also provide a valuable source of information to determine the types of sub-sectors likely to be included under a specific category. 

Governments are uniquely positioned to play a critical enabling role in facilitating the transition to a low-carbon and equitable economy by supporting the commercialization of innovative solutions through targeted R&D programmes. These programmes commonly featured as eligible expenditures within sovereign frameworks and are often particularly challenging to assess due to their broad nature, especially when R&D funding is based on a technology-agnostic approach that sets out desired outcomes, rather than specific technologies, as the key eligibility criteria. In such cases, the risk of R&D programmes funding technologies that are not aligned to the AIM Taxonomy needs to be carefully weighed against the benefits of supporting technological innovations.

A key factor to be considered when assessing the expected level of positive externalities that can be delivered by a sovereign impact framework is the anticipated funding allocation split across eligible categories. Ideally, governments should prioritize direct investments or expenditures where public funding can deliver the largest benefits, such as investments in large infrastructure projects within high emitting sectors. Expected geographical distribution of funding is another important factor that can highlight whether specific regional needs are being considered as part of the eligibility criteria.

Given the limited transparency typically provided at a pre-issuance stage, post-issuance reporting is of paramount importance to shed light on the funded portfolio of expenditures and projects and validate actual positive externalities delivered. Sovereigns, much like the rest of the market, should commit to reporting on both allocation and impact annually.

In addition to impact bond frameworks, we assess sovereigns as part of our responsible issuer assessment. We assess the breadth of a sovereign’s environmental and social policies and objectives, how these are governed, the level of ambition being targeted and the performance against the objectives.  Our environmental criteria consider the sovereign’s decarbonization strategies, including alignment to a 1.5°C pathway, climate resilience, and environmental protection. Examples of factors we consider include national NDCs, total and sector-level GHG emissions and their historical/current trends, emissions per capita, power generation mix and coal phase out timelines and the presence of national adaptation and biodiversity plans.

Our social criteria reviews sovereign’s policies and performance on social equity and development, protection, and human rights. Social indicators we take into account in our assessments include level of social spending, the presence of social security rights, inequality measures such as the Gini coefficient, unemployment rates, access to fundamental services such as healthcare and education and gender equality rankings.

How do we engage with sovereigns?

Issuer engagement is a core part of our verification and impact reporting process. Given the complexities linked to sovereign impact bond issuance, we actively seek to engage with sovereigns to promote best-practice standards, as well as to obtain clarifications on specific areas of the framework or reporting.

Where possible, we strive to engage with issuers early on in their process of developing a framework, as this is when constructive feedback can be most impactful. Additionally, in some specific cases we have taken a proactive approach to encouraging governments to enter the impact bond markets. For example, back in 2019 we met with government representatives from a developed country to discuss several topics related to green bond markets, including the key features of best-in-class sovereign green bond frameworks and the challenges and opportunities linked to a potential green bond issuance from the government in question. After the same government published its Green Bond Framework in 2021, we re-engaged with its representatives to discuss the framework in detail as part of our verification process. While there are a multitude of factors that lead to sovereign impact bond issuance, investors have an important role to play in communicating the benefits of sovereign impact bond issuance and promoting market best practices.

The UK & Spain: two sovereign verification case studies

In September 2021, both Spain and the UK launched their green bond programmes with debut issuance of EUR 5bn and GBP 10 bn, respectively. Both Spain’s and the UK’s green sovereign bonds have successfully passed our verification process and are included in our investable universe, with key assessment criteria summarized in the following paragraphs including:

  • Impact Bond Framework criteria:
    • Positive expected impact of use of proceeds categories
    • Prioritization of fund distribution across eligible categories within which the issuer can have the highest impact based on its mandate
    • Comprehensiveness of reporting commitments
  • Responsible Issuer criteria:
    • Breadth and ambition of national environmental and climate strategies and objectives and performance across these areas
    • Comprehensiveness and adequacy of national social policies and regulations related to human development and progress against these issues

Each framework has been assessed to have a positive impact potential based on both common and distinct factors. The two frameworks explicitly align their eligibility categories to green classification standards: Spain’s eligible expenditures are aligned with the EU Taxonomy, while the UK’s categories are mapped against the objectives of the UK Taxonomy, which is currently under development. The inclusion of specific emission intensity criteria for several categories within the Spanish framework further strengthens its eligibility requirements.

Overall, both frameworks prioritize expenditures in the countries’ key emitting sectors. The UK’s pre-issuance disclosure provides additional clarity on expected distribution of funds across eligible categories, further highlighting a strong emphasis on supporting projects within the transport sector, which accounts for the largest share of emissions in the UK. The two frameworks include a comprehensive set of reporting KPIs, facilitating tracking of proceed allocations and expenditure impacts. The inclusion of social co-benefit KPIs within the green gilt’s framework is a welcomed move that can support investors in understanding how eligible expenditure aligns with the government’s broader development strategy.

Both frameworks include some areas of uncertainty or potential concern related to specific eligible proceeds. In the case of Spain, the eligibility of expenditures supporting the conservation and improvement of animal genetic resources raises some apprehension regarding a portion of funding potentially being directed towards cattle farming without specified sustainability requirements. However, alignment to the EU Taxonomy and the explicit exclusion of intensive livestock farming provide us with enough reassurance to be able to pass the framework. Annual reporting will represent an important check-in point for us to validate our position based on allocation and impact information.

On the green gilt front, the inclusion of Carbon Capture, Utilization and Storage (CCUS) and blue hydrogen projects has sparked concerns among some green investors regarding the framework’s green credentials. The framework does not rule out the application of CCUS to fossil fuel-based assets or to other potentially controversial assets (e.g. bioenergy plants not committed exclusively to using sustainable biomass feedstocks). While we would have preferred to see such projects explicitly excluded from the framework, we also see the value of programmes aimed at supporting the development and cost reductions of CCUS technology. CCUS is expected to play a critical role in supporting the decarbonization of hard-to-abate sectors such as steel and cement manufacturing, as well as in providing carbon removal solutions such as Bioenergy with Carbon Capture and Storage (BECCS) both in the UK and globally. We will, nevertheless, closely monitor funding allocations towards this sub-category.

One of the key arguments against blue hydrogen is that it is not a zero-emissions production process, due to methane leaks occurring in the natural gas supply chain and to the rate of carbon capture being below 100%. Hence, there are concerns linked to the role that blue hydrogen could play in a net zero world. However, blue hydrogen has the potential to provide a key contribution to the development of a hydrogen market in the short term, while green hydrogen production capacity is still limited and costs are relatively high. This route is highlighted as the recommended approach by the Committee on Climate Change, as it would enable the use of hydrogen in a wider array of end-use sectors in the long-term compared to what would be possible if the UK were to rely exclusively on green hydrogen production from today onwards[4]. Moreover, according to recent estimates from BloombergNEF[5] the levelized cost of green hydrogen is expected to fall below that of blue hydrogen by 2030, further strengthening the economic case for ramping up green hydrogen production in the medium to long term. 

The UK’s hydrogen strategy[6] confirmed that the UK will take a “twin track” approach that will focus on both blue and green hydrogen production, with further details on the targeted production mix and blue hydrogen standards expected to be published in 2022. We believe that the strategy’s direction is broadly aligned to the CCC’s recommendations, although it will be important to ensure that support for blue hydrogen does not come at the expense of development of green hydrogen technologies and that the future hydrogen production mix remains aligned to the country’s net zero goal. We will keep monitoring closely further strategy and policy developments in this space.

From a Responsible Issuer front, the UK’s and Spain’s performance on environmental and social policies is satisfactory, although our analysis has highlighted key areas calling for improvement. Both countries have strengthened their national climate strategies and have set comprehensive climate targets, but the level of ambition and performance thus far differs between the two. The UK holds a leadership role in climate policy and has set ambitious emission reduction targets to 2030, in line with its net zero by 2050 pathway.  The country has made good progress in reducing its emissions to date, achieving almost a 50% reduction in overall emissions in 2020 compared to 1990 levels.[7] However, it will need to address several policy gaps to ensure it can meet its sixth carbon budget.  Spain, on the other hand, has lagged behind its EU peers on climate policy until recently, also due to limited political consensus on environmental issues.  The country’s 2021-2030 national energy and climate plan highlighted a strengthened commitment to prioritizing climate action and align with the EU’s net zero targets.  While interim decarbonization targets remain comparatively low within the EU context,[8] Spain’s achievement of its decarbonization commitments to date are a promising sign. Continued robust political consensus going forwards is a critical factor that we will keep an eye on to ensure that the risk of policies being reversed remains low.

The assessment of social policies within the two countries has been conducted accounting for context-specific factors including historical socio-economic development and central government’s remit on social issues.  The UK has an overall comprehensive welfare system and social policies, including robust social benefits, relatively strong universal healthcare system and a good track record on gender equality. However, Brexit has negatively affected the social policy context in several ways, including by reducing benefits to EU citizens, diverting attention away from key social policy issues and bringing uncertainty in economic stability. Social performance indicators including increasing higher education rates, constraints on healthcare service provision, stagnating social mobility and widening wealth gap highlight that improvements are required in specific areas of education, healthcare and inclusion. Spain’s social policy framework includes several particularly progressive legislations, including social security rights being enshrined in the country’s constitution, and strong gender equality performance. However, a particularly challenging set of economic and political crises have hindered overall performance from a social perspective. The country is affected by a combination of structural issues that need addressed, including high unemployment rates and weaker performance in several metrics including social mobility and education compared to EU average.

Once our Verification process is complete, our Portfolio Management team makes investment decisions to deliver competitive financial returns. Both sovereign green bonds discussed above benefited from considerable investor demand on their days of issue.  The UK gilt attracted £100bn of orders for a £10bn bond.  The Spanish bond was just as popular, attracting EUR 60bn orders for a EUR 5bn bond.

While the Green Gilt framework is included in our investable universe, we ultimately did not invest in the UK’s debut issuance due to unattractive valuation, but we continue to monitor. Nevertheless, we expect the UK’s debut Green Gilt to be an extremely useful addition to the market, as a liquid and efficiently priced green GBP-denominated bond of high quality, as well as a reference point to help develop a fuller GBP bond universe.

On the other hand, we invested in Spain’s debut issuance. We thought the issue came at a reasonable price relative to other green bonds in EUR in our portfolio and were very pleased to see that the issuer took into account interest from dedicated green investors, which received two thirds of total allocation.[9]


Sovereign issuance is expected to become an increasingly prominent part of the impact bond market, providing key opportunities for contributing to progress in national environmental and social strategies, as well as supporting the further development of green bond markets in both developed and emerging economies.

However, investors are faced with a unique set of challenges when evaluating the potential impact of sovereign green, social and sustainability bonds. Our established verification process, combined with tailored sovereign criteria, targeted market engagement and close monitoring of post-issuance reporting allows our Sustainability team to critically select sovereign impact frameworks that can deliver material positive externalities.

[1] AIM assessment based on data from Climate Bonds Initiative Labelled Green Bonds Database, the International Capital Markets Association Sustainable Bonds Database and the Luxembourg Green Exchange. Data as of 26th October 2021.

[2] Environmental Finance, Bond round-up: Enel, Iceland, NRW.BANK, CTP, B3, Coca-Cola FEMSA…and more, 29th September 2021. Available at:…-and-more.html

[3] Affirmative Investment Management, Sovereign Green Bond Rules Supreme, 11th January 2018. Available at:

[4] Committee on Climate Change, Policies for the Sixth Carbon Budget and Net Zero, December 2020. Available at:

[5] BloombergNEF, 1H 20201 Hydrogen Levelized Cost Update, April 2021.

[6] HM Government, UK Hydrogen Strategy, August 2021. Available at:

[7] Committee on Climate Change, Progress in reducing emissions, June 2021. Available at:

[8] European Commission, Assessment of the final national energy and climate plan of Spain, October 2020. Available at:

[9] Crédit Agricole CIB, Spain Launches its first ever green bond, September 2021. Available at:,Bonds)%20due%2030%20July%202042.