Rebuilding Trust in Sustainability-Linked Debt: Insights from Cape Town

In February 2026, BwB convened a roundtable discussion at the LMA & ICMA Annual African Summit in Cape Town, bringing together sovereign issuers and a diverse range of stakeholders from across the sustainable finance ecosystem to examine the current state of the sustainability-linked debt market and discuss pathways forward. 

Spanning both bonds and loans, the sustainability-linked debt market has lost considerable momentum in recent years.  

Following the issue of the world’s first sustainability-linked bond (SLB) by Italian energy company Enel in 2019, the sector initially experienced rapid growth – attracting issuers drawn to their structural flexibility and investors seeking exposure to sustainability outcomes. In the subsequent years the market grew to approximately $300bn in size, with annual issuances reaching their peak in 2021¹. However, by 2025, annual issuance had fallen to roughly US$30 billion, representing a 24% decline from the previous year and down 54% compared with 2023². This contraction has been driven primarily by mounting investor concerns about the ambition and integrity of SLB structures – a pattern also evident, if less acute, in the sustainability-linked loan (SLL) market. The sustainability-linked loan (SLL) market, while significantly larger in volume (at approximately US$610 billion in 2024), has faced parallel questions around credibility, with growing scrutiny from both regulators and market participants.  

The Cape Town roundtable took this decline in market confidence as its starting point, examining both the structural causes and how these instruments could be retooled to build back trust. While the summit was Africa-focused, the challenges and solutions discussed have clear relevance across emerging markets more broadly, where many of the same constraints identified by participants – data infrastructure, institutional capacity, and level of market development – are applicable. 

Structural and integrity challenges 

Participants identified a range of design and governance weaknesses that have undermined market credibility. Whilst comments were predominantly aimed at SLBs, many of the criticisms also apply to the SLL market.  

One common criticism was the lack of ambition of key performance indicators (KPIs): targets set close to business-as-usual trajectories, baselines weakly defined or inconsistently applied, and coupon step-up mechanisms calibrated at levels too modest to constitute a meaningful financial incentive.  

Structural issues have compounded this problem. For example, participants highlighted the use of callable bonds that allow issuers to exit before KPI observation dates are reached, KPI similarly, observation dates set too late in the bond’s tenor to preserve a meaningful window for financial incentives to kick in, and step-up mechanics that lack transparency or enforceability. 

However, participants were clear that KPI integrity, while important, is not the only, or even the most significant, barrier to scaling sustainability-linked debt in emerging markets. Two larger structural challenges demand equal attention. 

First, the complexity and coordination burden placed on issuers is substantial. Structuring a credible SLB or SLL requires deep technical engagement across finance, sustainability, and policy functions, as well as coordination with external parties, including second party opinion (SPO) providers and measurement, reporting, and verification (MRV) specialists. For many borrowing institutions, insufficient integration across internal functions can result in KPIs being developed without adequate input from those best placed to assess their achievability or materiality. This can produce commitments that appear ambitious but lack practicality or substance, or are so conservatively framed that there is no real risk of non-achievement. For sovereign is, where coordination must span multiple government ministries and agencies, this complexity and coordination burden is significantly magnified. 

Second, debt-carrying capacity and debt ceilings represent a fundamental constraint, particularly for African sovereigns. Even where strong political will and a compelling sustainability case exist, many governments face limited fiscal headroom, restricting their ability to issue new debt of any kind. Sustainability-linked structures do not resolve underlying debt sustainability concerns, and the additional structuring costs and reputational risks of a poorly executed issuance can make the calculus unattractive for finance ministries already operating under severe fiscal pressure. Until these macro-fiscal realities are addressed, whether through debt relief, concessional blending, or other mechanisms, the potential of sustainability-linked debt in the markets that arguably need it most will remain unrealized. 

The case for sovereign sustainability-linked debt 

Despite these concerns, there was broad agreement among participants that sustainability-linked debt instruments remain potentially powerful financing tools, particularly for sovereign and sub-sovereign issuers in Africa and emerging markets. Unlike use-of-proceeds instruments such as green bonds, they allow governments to raise general purpose financing by committing to measurable national-level sustainability outcomes. For sovereigns with limited pipelines of ring-fenceable green projects – a common constraint across many African nations and emerging markets more broadly – this flexibility has real practical significance, enabling alignment between debt financing and policy objectives without restricting budget allocation. 

However, realizing this potential requires overcoming the existing credibility and structural challenges. Identifying KPIs that are simultaneously ambitious, measurable in a low-data environment, and meaningful relative to a country's specific development and climate context requires sustained technical engagement and effective coordination across government agencies – conditions that cannot be assumed. Impact-oriented market actors have an important role to play in building capacity in this regard. 

The materiality of financial incentives was also highlighted as a concern. Step-up and step-down mechanisms are the primary channel through which sustainability-linked instruments create alignment between issuer behavior and sustainability outcomes, yet in practice these are frequently set at levels that are unlikely to influence decision-making. Participants noted the need for more systematic and ambitious calibration of these mechanisms, with some support voiced for greater standardization across the market. 

Nature-based KPIs: potential and constraints

A significant portion of the discussion focused on the potential of nature and biodiversity KPIs, an area that remains largely underdeveloped despite growing policy interest. Uruguay's 2022 sovereign SLB³, which embedded native forest preservation alongside emissions targets and included a two-way coupon adjustment, was cited as an instructive example of what is possible. 

The barriers to achieving more widespread use of nature-based KPIs are partly technical. Nature outcomes are highly context-specific and do not lend themselves easily to standardized metrics. Whilst carbon has frequently served as a proxy for broader nature improvement, participants with direct experience in MRV for nature-based instruments were clear that this approach has significant limitations. Carbon performance and ecological outcomes are not equivalent, and conflating them risks both mismeasurement and misaligned incentives. Developing credible, sector-relevant biodiversity KPIs requires investment in both methodology and local data infrastructure, both of which remain underdeveloped in most African and emerging markets.  

Towards higher-integrity issuance 

The Cape Town discussion reinforced both the scale of the structural challenges facing sustainability-linked debt markets and the strength of shared commitment among practitioners to address them. For SLBs and SLLs to regain credibility and momentum, improvements in KPI design, verification infrastructure, and financial incentive calibration are necessary, but they will not be sufficient without honest engagement with the issuer capacity constraints and macro-fiscal realities that determine what is practically achievable. 

The green bond market offers an instructive precedent. It too faced early skepticism around greenwashing, inconsistent standards, and limited issuer capacity, yet through sustained efforts to strengthen frameworks, build verification infrastructure, and deepen investor confidence, it has grown into a trillion-dollar market that channels capital at scale towards environmental outcomes. There is no reason sustainability-linked debt cannot follow a similar trajectory. In some respects, the opportunity is even greater: by tying financing to measurable outcomes rather than restricting use of proceeds, these instruments offer a flexibility that is particularly well-suited to sovereign issuers in emerging markets, where ring-fenceable project pipelines are often limited but the need for climate and nature-aligned investment is acute. 

Realizing that potential, however, will require the market to move beyond incremental fixes. It demands higher standards of KPI ambition and verification, more consequential financial incentives, serious investment in issuer capacity, and a willingness to confront the macro-fiscal constraints that currently exclude many of the countries where these instruments could have the greatest impact. BwB is committed to working with partners across the sustainable finance ecosystem to drive these changes, because we believe a high-integrity, high-volume sustainability-linked debt market is not only achievable but essential to financing the climate and nature transition at the pace and scale that emerging economies require. 

To learn more about our work in this area or to explore potential collaboration, please reach out to a member of the team at contact@bwb.earth.