Highlights:

• Despite a challenging environment, the share of EM ESG issuance in the sovereign space increased last year. The Ukraine invasion has brought about a significant change in the perception of ESG sovereign risk and we anticipate further growth in EM ESG sovereign issuance alongside the development of the ESG sovereign framework.
• EM sovereigns have lower ESG ratings than DM countries while requiring investment inflows to fund their ESG transition. Although labelled bonds have received criticism, they play a role in driving investments toward ESG projects in EM countries and are part of the solution.
• The focus of EM ESG sovereign issuance will remain on the investment-grade (IG) space, with new IG countries issuing their first labelled bonds. Sustainable and green bonds will continue to represent the bulk of the issuance.
• In 2022, a few EM countries issued their first sovereign Sustainability-Linked Bonds (SLBs), which are a relevant tool for aligning investors' and issuers' objectives. However, there are relevant caveats. We anticipate more issuance but from EM countries that are already advanced in their ESG issuance policy and have good ESG ratings.
• EM labelled bonds greenium varies significantly by bond and country. We anticipate it to tighten as EM ESG issuance gains traction.

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