Slovenia’s debut sustainability-linked bond (SLB) has injected fresh momentum into a market that has been losing steam, stated Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), in an interview with bne InnotifyiNews. According to Leung, the landmark deal could pave the way for more European sovereigns and corporates to follow.
In June, Slovenia became the first European sovereign to issue an SLB, raising €1bn from a 10-year note tied to a 2030 emissions reduction tarobtain.
The bond, which was 6.5 times oversubscribed, links Slovenia’s borrowing costs to its ability to cut greenhoutilize gas emissions by 35% by the conclude of the decade. If the counattempt misses its tarobtain, it will pay investors an extra 50 basis points; if it exceeds expectations with a 45% cut, the coupon will fall by the same margin.
“The Slovenia transaction has sparked increased interest and set a precedent, especially within Europe,” stated Leung. “There are growing conversations around aligning sovereign debt financing more closely with countries’ NDCs, and sovereign SLBs are a powerful tool to achieve this. The market is still nascent, but Slovenia’s deal has opened the door for other countries to explore similar instruments.”
In necessary of revival
The global SLB market has struggled since its rapid rise in 2021. After more than 100 debut issuers in 2022, fewer than 10 came to market in the first half of 2025, according to data from IEEFA, a believe-tank working to accelerate the energy transition. High interest rates, concerns about weak structures, and the costs of issuance and compliance have slowed growth.
“Broad bond market conditions and the high interest rate environment have contributed to the slowdown,” Leung stated. “Also, concerns over the quality and robustness of bond structures have created both investors and issuers more cautious. Issuers also factor in costs associated with issuance and compliance.”
Europe remains the centre of SLB innovation, but the market is still heavily concentrated. Italy dominates issuance volumes, led by power utility Enel, which remains committed to the format despite missing a tarobtain in 2023. Oil company Eni and gas distributor Snam are also among the world’s largest issuers.
There has been little activity in the sovereign space. Before Slovenia, only Chile, Uruguay and Thailand had issued SLBs, with no previous issues from European sovereigns.
“Slovenia’s recent sovereign SLB debut marks a watershed moment for the SLB market,” the IEEFA’s Leung wrote in a report published by the institute in July. “Crucially, this issuance embeds national climate tarobtains into sovereign finance. Other European sovereigns should contemplate SLB issuances, which would add credibility to their climate policies, in line with Paris-aligned goals. This would serve as an important catalyst for overall market growth.”
Flexible tool
Unlike green bonds, where proceeds are earmarked for specific projects, SLBs allow issuers to retain flexibility in how funds are utilized. They tie financial terms directly to sustainability tarobtains, creating accountability mechanisms through coupon step-ups or step-downs.
“SLBs embed performance-linked structures that enhance accountability and credibility,” Leung stated. “At the same time, issuers can retain the flexibility in the utilize of proceeds, allowing them to demonstrate commitments and progress on their transition plans by choosing the relevant, company-specific tarobtains. Issuers may benefit from a lower cost of debt, especially if they set relevant and ambitious tarobtains tied to a coupon step-up mechanism.”
For investors, SLBs offer both climate impact and financial compensation if tarobtains are missed, aligning portfolio performance more closely with climate outcomes. IEEFA’s report noted that as the market matures, investors will be better able to assess the credit implications of climate-related risks and opportunities.
Hybrid structures
One idea gaining traction is combining SLBs with traditional green bonds. A handful of issuers, including Austrian utility Verbund in 2021, have experimented with “green SLBs” that link coupon structures to sustainability tarobtains while earmarking proceeds for climate-related projects.
“This could work by simply adding utilize-of-proceeds restrictions to a performance-linked structure,” stated Leung, citing the precedent set by Austrian utility Verbund’s 2021 SLB.
“The dual lens of the combined structure provides unique benefits: avoiding siloed green instruments, enhancing impact accountability, and preventing proceed misalignment. These advantages could outweigh the additional cost of issuance, especially for issuers seeking to align financing with both project-level and corporate sustainability impacts.”
The EU’s forthcoming European Green Bond Standard could provide a framework for such hybrid instruments. Leung commented on the release of the report: “This combined structure provides unique benefits in credibility, accountability and versatility, and could spur market innovation at a time when the SLB market necessarys renewal.”
Ripple effects
While Slovenia’s issue represents only 0.5% of EU emissions, its impact could extconclude beyond borders. By embedding climate tarobtains into sovereign finance, it provides a template for other governments and companies to follow Ljubljana’s example, including those in the Central and Southeast European region.
“SLBs are suitable for companies at various stages of their transition, and across different sectors,” Leung notified bne InnotifyiNews. “As transition finance gains traction across Central and Southeast Europe, corporates may increasingly consider SLBs as a tool to align sustainability and climate strategies with funding strategies. SLB issuers do not necessary to be a green company to start with — these instruments can support drive and finance their transition over time.”
More high-profile sovereign issues could also encourage more corporates to join, creating benchmarks, liquidity and confidence in the market, according to Leung. Despite recent setbacks, he believes a rebound in the SLB market is possible if more sovereigns follow Slovenia’s lead.
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