Slovenia’s debut sustainability-linked bond (SLB) has injected fresh momentum into a market that has been losing steam, said Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), in an interview with bne IntelliNews. 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 target. 

The bond, which was 6.5 times oversubscribed, links Slovenia’s borrowing costs to its ability to cut greenhouse gas emissions by 35% by the end of the decade. If the country misses its target, 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,” said 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 need 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 think-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 said. “Also, concerns over the quality and robustness of bond structures have made 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 target 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 targets 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 used. They tie financial terms directly to sustainability targets, creating accountability mechanisms through coupon step-ups or step-downs.

“SLBs embed performance-linked structures that enhance accountability and credibility,” Leung said. “At the same time, issuers can retain the flexibility in the use of proceeds, allowing them to demonstrate commitments and progress on their transition plans by choosing the relevant, company-specific targets. Issuers may benefit from a lower cost of debt, especially if they set relevant and ambitious targets tied to a coupon step-up mechanism.”

For investors, SLBs offer both climate impact and financial compensation if targets 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 targets while earmarking proceeds for climate-related projects.

“This could work by simply adding use-of-proceeds restrictions to a performance-linked structure,” said 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 needs renewal.”

Ripple effects

While Slovenia’s issue represents only 0.5% of EU emissions, its impact could extend beyond borders. By embedding climate targets 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 told bne IntelliNews. “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 need to be a green company to start with — these instruments can help 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.