Sustainability-linked bonds (SLBs) were designed to solve a practical problem: how to align corporate financing with sustainability performance without restricting how capital is used. Instead of earmarking proceeds, issuers commit to measurable sustainability targets, with pricing penalties if they fall short.
For emerging markets, flexibility matters. It explains why Latin America has become one of the most active regions globally for SLB issuance, spanning corporates, financial institutions, and sovereign-linked entities.
ASEAN markets, by contrast, have adopted SLBs more cautiously and unevenly.
This divergence comes down to execution, incentives, and credibility. For ASEAN businesses considering SLBs, or questioning whether they are worth the effort, LATAM’s experience offers practical, business-relevant insights we explore below.
What are SLBs?
According to the International Capital Market Association (ICMA), sustainability-linked Bonds are structurally linked to the issuer’s achievement of climate or broader UN Sustainable Development Goals (SDGs), including those related to climate change. The bonds may be linked to key performance indicators (KPI-linked) or sustainable development goals (SDG-linked).
Progress, or lack thereof, toward the SDGs or selected KPIs results in an increase or decrease in the instrument’s coupon. These bonds can play a key role in encouraging companies to make sustainability commitments at the corporate level.
The Global Network of National Adaption Plans reports that most climate change-related objectives of SLBs to date have focused on mitigation, but that companies or governments could use the financing issued through these bonds to undertake adaptation projects, such as improving flood protection. Adding impact metrics that capture improvements in climate resilience could allow companies or governments to leverage SLBs and increase financing for adaptation outcomes.
LATAM’s SLB Market: From Experiment to Financing Tool
Latin America’s SLB market has grown rapidly since the early 2020s. Though progress is uneven, markets such as Brazil, Chile, Mexico, and Peru have made strides. Corporates in utilities, energy, mining, consumer goods, and banking have all accessed the market, often through benchmark-sized deals rather than symbolic issuances.
Brazil hosts the region’s largest sustainable debt market overall.
According to the Climate Bonds Initiative, by the end of H1 2025, Brazil’s cumulative GSS+ (Green, Social, Sustainability, and Sustainability-linked) debt reached USD67.8bn, with USD49.3 billion (73%) aligned to Climate Bonds’ criteria. The country boasts 152 issuers. Brazilian corporates such as Natura (cosmetics and bio‑ingredients), which won the 2025 sustainability-linked bond of the year, have issued SLBs tied to sustainable sourcing and Amazon bioeconomy targets. Additionally, sectors including basic materials (paper and pulp with issuers like Suzano) and logistics have also accessed SLBs and other sustainable instruments.
Mexico’s sustainable debt market has grown rapidly
The Climate Bonds Initiative reported that cumulative Green, Social, Sustainability and Sustainability‑Linked Bonds (GSS+) issuance reached around USD 38.3 billion by the end of 2023, making it the second‑largest labelled bond market in the region and showing strong demand from both public and private issuers. Within this, Mexican corporates, notably Cemex (construction materials sector) and Coca‑Cola FEMSA (beverages sector), have issued sustainability‑linked bonds tied to decarbonization and water‑use targets. Additionally, development banks and financial institutions, such as the Inter-American Development Bank and the International Finance Corporation, are active in sustainable bond placements supporting infrastructure and SME (small and medium enterprise) financing.
Chile is a global pioneer for SLBs issued at the sovereign level.
In 2022, Chile was the first country to issue a sovereign SLB, linking KPI’s to Chile’s Nationally Determined Contributions (NDCs). It has since refined its framework, expanded KPI coverage, and published regular performance reports. More recently, in January 2026, Crédit Agricole CIB announced that it is supporting the Chilean Government in launching the first-ever SLB to feature a standalone biodiversity KPI. The bond targets both the expansion of terrestrial protected areas and the effective management of those areas. The emphasis on transparency and post-issuance reporting has helped establish SLBs as repeatable, robust instruments rather than symbolic transactions.
Challenges
Early sustainability-linked bond issuance in Latin America, while groundbreaking, faced several notable challenges that shaped the current market:
- Initial transactions were often overly ambitious or poorly calibrated, with KPIs that were difficult to measure or lacked independent verification, undermining investor confidence.
- In some cases, issuers leaned on headline ESG (environmental, social and governance) targets without integrating them meaningfully into business operations, leading to skepticism about whether coupon adjustments would ever be triggered.
- Market infrastructure also lagged: reporting standards, post-issuance transparency, and secondary market liquidity were limited, reducing the appeal of SLBs to institutional investors.
- Furthermore, smaller corporates and new issuers sometimes misaligned bond structures with operational capacity, creating execution risks and delayed repayments.
These early missteps, though not widespread, highlighted the need for robust frameworks, credible and measurable KPIs, and disciplined reporting as prerequisites for scaling SLBs effectively in the region. Crucially, SLBs in LATAM are no longer treated as ESG side projects. They are issued alongside conventional bonds, frequently with similar tenors and investor bases.
Insight 1: SLBs Work Best When They Are Treasury-Led
One of the clearest signals from LATAM is organizational, not financial: the most credible SLB issuers are those where treasury, finance, and sustainability functions are tightly integrated.
Early LATAM deals that struggled were often driven by sustainability teams seeking to showcase ambition. Later, more successful issuances were structured by treasury teams who treated sustainability targets as financial risk variables; no different in principle from FX exposure or refinancing risk.
For ASEAN corporates, this distinction is critical. An SLB introduces a contingent liability. If targets are missed, funding costs rise. That is not an ESG issue; it is a balance-sheet issue.
Key implication:
If the finance function does not have confidence in the company’s ability to influence the KPI outcome, the SLB will increase risk rather than lower the cost of capital.
This also explains why some LATAM corporates delayed issuance until internal data systems and operational controls were in place. SLBs reward operational discipline and penalize wishful thinking.
Insight 2: KPI Design Determines Market Reception and Pricing
LATAM’s SLB market shows a clear divide between deals that were well received and those that drew investor criticism. The difference usually came down to KPI design.
Strong deals tended to share three characteristics:
- Materiality: KPIs linked directly to core revenue drivers or cost structures (e.g. emissions intensity in energy-intensive sectors).
- Simplicity: One or two KPIs, clearly defined and easy to track.
- Ambition: Targets that exceeded business-as-usual trajectories.
Weaker deals often relied on:
- KPIs that were peripheral to the business.
- Targets that appeared easily achievable.
- Vague baselines or limited disclosure.
Analysts, including in academic journals such as the Journal of Risk and Financial Management, have highlighted that, in some SLB issuances, KPI targets lack ambition or are set close to a business-as-usual trajectory rather than aligned with credible transition pathways. This undermines perceived value for investors and weakening pricing incentives.
Investor reactions have become increasingly blunt. Asset managers and stewardship teams now openly flag “soft” KPIs, and some have declined to participate in follow-on deals where credibility was questioned.
In contrast, Suzano’s sustainability-linked bond has been recognized as a benchmark SLB in Latin America, having won the 2021 SLB of the year award. As reported by Environmental Finance, the SLB had clear performance targets tied to a 15 % reduction in greenhouse gas emissions intensity by 2030 and a defined step-up if targets aren’t met. This KPI was directly linked to the company’s core business risk profile (carbon footprint), was easy to measure, and was considered credible and ambitious enough to attract strong investor demand.
Key implication:
A poorly designed KPI raises the cost of future capital. A useful test emerged from LATAM: if a KPI would not be discussed seriously at board level without the bond attached, investors are unlikely to respect it.
Insight 3: SLBs Are About Exposing Execution Risk, Not Hiding It
There is a persistent misconception in some markets that SLBs should only be issued when targets are almost guaranteed to be met. LATAM experience suggests the opposite.
Energy, utilities, and extractive firms, i.e. sectors with real transition risk, have been among the most active SLB issuers. These companies used SLBs precisely because outcomes were uncertain, but within management control. The pricing step-up was treated as a quantified downside, not a reputational catastrophe.
This framing matters. It allowed management teams to:
- Price transition risk explicitly.
- Communicate trade-offs transparently to investors.
- Align internal incentives with external commitments.
For ASEAN corporates, this highlights a boundary condition. SLBs are poorly suited to companies that:
- Lack control over their value chain.
- Rely heavily on third-party data they cannot verify.
- Face regulatory volatility without mitigation levers.
Key implication:
SLBs are risk-sharing instruments, not a means of hallmarking confidence. Used correctly, they can attract longer-dated capital.
Insight 4: Credibility Has Become a Financing Variable
LATAM markets have demonstrated a “track-record effect” in SLBs. Issuers that reported consistently, engaged openly with investors, and met or narrowly missed targets retained market access. Those that failed to report adequately or treated disclosure as a formality faced tougher scrutiny on subsequent deals.
This dynamic is accelerating globally. Investors increasingly compare SLB performance across regions and sectors. ASEAN issuers are no longer benchmarked only against local peers but against LATAM, EMEA, and global issuers. External scrutiny has become central to this process. In LATAM, second-party opinions at issuance and third-party post-issuance verification are now increasingly expected rather than optional.
Key implication:
The first SLB issuance is a reputational anchor. It shapes investor expectations for years.
Issuers should assume that weak disclosure will raise future funding costs, even outside the sustainability-linked market.
What This Means for ASEAN Issuers
ASEAN markets are not lagging because they lack sustainability ambition. They lag because SLBs demand a level of internal integration and execution discipline that many firms are still building.
LATAM’s experience suggests that SLBs reward companies that:
- Embed sustainability into capital planning.
- Design KPIs that reflect real business risk.
- Accept execution uncertainty transparently.
- Invest early in credibility and disclosure.
For issuers that meet those conditions, SLBs can lower long-term financing costs and broaden the investor base. For those that do not, they are likely to do the opposite.
The lesson is not to copy LATAM’s issuance volumes or sector mix. It is to adopt the mindset that made those deals work: treating sustainability-linked finance as finance, not signaling.
