Like inflation-linked bonds (ILBs), transition linkers adjust their coupon payments based on measurable outcomes — in this case, whether a country meets its climate or nature-related targets. The paper outlines how transition linkers could be structured, using targets rooted in countries’ Nationally Determined Contributions (NDCs) or biodiversity goals, and how these could be linked to incremental coupon adjustments (step-ups or step-downs) based on performance.
Such a mechanism creates an ex-ante financial agreement, where both investors and issuers benefit: governments gain access to potentially lower cost financing when they deliver on transition goals, and investors receive higher payouts when they backtrack on commitments.
In our view, Latin America provides a strong setting to pilot these instruments. The region accounts for the majority of market value in the Bloomberg Emerging Market ILB Index, indicating deep investor familiarity with inflation-linked structures. It also includes countries with significant climate and biodiversity commitments. By analysing hypothetical transition linker structures in key countries, we demonstrate how governments could use these bonds to align financial incentives with real economy transitions.
For investors seeking to hedge transition risk and drive sustainability outcomes, transition linkers offer a pioneering new tool. They provide both macroeconomic and portfolio-level value, as they are capable of reducing correlation between sovereign bonds and equity returns when transition falters. At the same time, they help governments commit credibly to their sustainability targets.
This research lays out both the conceptual foundations and technical considerations needed to move from idea to implementation in a region where the stakes are high and the market infrastructure is ready.
We will present and discuss this paper at the conference, “Nature and the economy: Environmental change, economic adjustment, and policy challenges”, taking place in Mexico City on 2-3 October 2025 and jointly organised by The Centre for Economic Transition Expertise (CETEx), El Colegio de Mexico (ColMex), Sustainable Macro, and Sureal.
