I. Chilean Climate and Transition Strategy

i) What are Chile’s key statutory commitments to climate mitigation?

In its 2020 National Determined Contribution (NDC), Chile made two commitments in the mitigation contribution area:

1. Chile commits to a GHG emissions budget that will not exceed 1,100 MtCO2eq, between 2020 and 2030, with a maximum of GHG emissions (peak) by 2025, and to reach a GHG emissions level of 95 MtCO2eq by 2030.
2. A reduction of at least 25% of total black carbon emissions by 2030, compared to 2016. This commitment will be implemented mainly through national policies associated with air quality. In addition, it will be monitored through permanent and periodic work to improve the information on the black carbon inventory.

ii) When did the Republic of Chile first submit an NDC? What was the context for its last updated NDC of 2020?

In 2016, Chile submitted its first Intended National Determined Contribution and in 2020 submit its National Determined Contribution update.

The 2020 update of the NDC took place in parallel with the drafting of the Framework Law on Climate Change for Chile, so it was designed in such a way as to align our international climate commitments with the guidelines and instruments proposed by the Draft Law. In this project are established the long-term climate objectives of the country, the principles that will guide climate action, and at the same time, the climate governance structures and arrangements that will allow progress towards a low-emission and climate-resilient economy.

iii)What is the GHG calculation methodology used by the Republic of Chile? Is it in line with UNFCCC methodology?

Chile's National on Greenhouse Gases Inventory (NGHGI) covers the entire national territory and includes emissions and removals of carbon dioxide (CO2) and emissions of methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6) in a time series that goes from 1990 to 2018. The results of the GHG estimates are presented in kilotonnes (kt) and refer to 2018, the last year of the inventory, unless otherwise specified.

The NGHGI of Chile was prepared following the 2006 IPCC Guidelines for national greenhouse gas inventories, where the economic sectors of a country are grouped into five sectors that share characteristics related to the processes that generate GHG emissions or absorptions. These sectors are Energy; Industrial Processes and Product Use (IPPU); Farming; Land use, land-use change and forestry (LULUCF) and Waste.

The methodology for the disaggregation of the last NGHGI of Chile consisted of identifying representative variables (proxy) of the GHG emissions or absorptions of the Energy, IPPU, Waste (liquid) and Collected Wood Products (PMR) sectors of LULUCF, that had a strong correlation with the GHG source or sink. With these proxies, national GHG emissions and removals were disaggregated into 16 administrative regions. The GHG emissions and removals of the Agriculture, LULUCF (less PMR) and Solid Waste sectors are estimated by the Sectoral Technical Team, so it was not necessary to disaggregate them during this process and it was only required to compile them at the regional level.

iv) How does the Republic of Chile intend to reach its 2030 and 2050 GHG emissions reduction targets?

In December 2021, the Ministry of Environment (MoE) published Chile’s Long-Term Climate Strategy (LTCS), which consolidates several initiatives led by different members of the State. This document presents a long-term vision for Chile and compiles the commitments and contributions in mitigation, adaptation, and different sectorial areas as well as addresses internal coordination issues, cost-effectiveness analysis and its means of implementation and monitoring.

Among the factor that support the achievement of this target, are included:

• Strong commitment through Chile’s government and public policy and initiatives to increase the proportion of electric generation derived from NCRE.
• Support from the technical teams at multinational institutions.
• Increased availability of renewable energy sources.
• Investments in increasing renewable energy infrastructure.
• Investments to increase renewable energy supply and generation, such as green hydrogen, electromobility, and solar/wind power plants.
• The phase-out of conventional fuel sources, such as coal.

II. Sustainability-Linked Bonds

i) What is a Sovereign Sustainability-Linked bond?

According to ICMA, “Sustainability-linked bonds (“SLBs”) are any type of bond instrument for which the financial and/or structural characteristics (i.e., coupon, maturity, repayment amount) can vary depending on whether the issuer achieves predefined Environmental, Social or Governance (ESG) objectives, measured through a pre-defined Key Performance Indicator (KPI) within a predefined timeline, and which are aligned with the five core components on the Sustainability-Linked Bond Principles (“SLBP”).

ii) What are the Sustainability-Linked Bond Principles?

The International Capital Markets Association (ICMA) published the Sustainability-Linked Bonds Principles (SLBP) in June 2020, helping the market to further grow and develop. SLBP provided clarification around SLBP issuance approach and clarity around SLB financial and sustainability parameters. SLBP are not mandatory but voluntary guidelines offering guidance to any SLB issuer regarding the structuring features, disclosure and reporting. The Principles have five core components:

1. Selection of Key Performance Indicators (KPIs): The KPIs should be:

• relevant, core and material to the issuer’s overall business, and of high strategic significance to the issuer’s current and/ or future operations;
• measurable or quantifiable on a consistent methodological basis;
• externally verifiable; and
• able to be benchmarked, i.e. as much as possible using an external reference or definitions to facilitate the assessment of the SPT’s level of ambition. 

2. Calibration of Sustainability Performance Targets (SPTs): which should be ambitious and set considering credible benchmarks.
3. Bond characteristics: The cornerstone of a SLB is that the bond’s financial and/or structural characteristics can vary depending on whether the selected KPI(s) reach (or not) the predefined SPT(s)
4. Reporting: issuers should publish relevant information on the performance of KPIs, SPTs and any information relevant to monitor the level the ambition of the SPTs, at least annually.
5. Verification: Issuers should seek independent and external verification of their performance level against each SPT for each KPI by a qualified external reviewer with relevant expertise.

iii) Must all KPIs and SPTs be included in each issuance?

The selection of SPT will depend on the bond characteristics, such as, the maturity of the bond and the financial characteristics of the premium in case of failure.

III. Chile´s Sustainability-Linked Framework Strategy and Rationale

i) Can you please explain the rationale for publishing the Framework?

The elaboration and publication of this new framework, follows the Ministry of Finance’s efforts towards the development of sustainable finances and the fulfillment of the climate commitments of the country. Since 2019, the Public Debt Office has integrated the issuance of green instruments into its usual operations, which in 2020 was extended to social and sustainable instruments. The publication of this new Framework continues this path.

As an extension of Chile’s sustainable development strategy, Chile remains a pioneer within the sustainable finance space:

• Chile became the first country in the Americas to issue Green Bonds in 2019 and continued its commitment as a leader in sustainability by issuing its first Social Bond transaction in 2020 and inaugural Sustainable Bond deal in 2021.
• Currently (end of January 2022), Chile’s ESG instruments are equivalent to US$31 billion, which represents 28.3% of total debt. (17.8 social bonds, 7.7bn green bonds, y 5.5bn sustainable)
• The issuance of Chile’s sovereign green bonds started in 2019 and provided positive financial results while simultaneously demonstrating Chile’s commitment to climate action.

SLBs, allows ESG investors see to invest in instruments that encourages the issuer to meet those goals, because in the targets are not complied, the issuer must pay a premium,  increasing the cost of his debt. Therefore, in this scheme, the issuer will make all the effort to meet its goals and not paying the financial penalty.

ii) Is this framework aligned with the Sustainability-Linked Bond Principles (SLBP)?

Yes, this SLB Framework is aligned with the ICMA Sustainability-Linked Bond Principles published in June 2020, as confirmed in the second party opinion provided by Sustainalytics

Additionally, Sustainalytics has indicated in the opinion that it believes that the SLB Framework is aligned with Chile’s climate change and renewable energy policies, commitments and laws.

iii) Can you explain what is innovative about this Framework?

Many elements about this Framework are innovative:

1. First sovereign SLB
2. First sovereign to hold itself financially accountable for not meeting the NDC commitments and thus, Paris Agreement, through KPI 1. 
3. The second KPI is focused on improving renewable energy consumption, where the energy sector represents the largest proportion of Chile’s national GHG emissions. This KPI is innovative and goes a step beyond by specifically focusing on “non-conventional” renewable energy, excluding large-scale hydropower - signaling our utmost care with the environmental impact of this KPI

iv) Moving forward, does the Republic expect to still issue Green, Social, and Sustainable Use of Proceeds bonds?

Yes, we plan to continue with a combination of those instruments. The combination will depend on whether we have enough green projects to issue green or sustainable bonds with a "use of proceeds" scheme, and, on the other hand, the demand or interest for Chile SLBs instruments.

v) How will bonds issued under the SLB portion of this Framework differ from Chile’s Green, Social, and Sustainable Bonds?

The resources obtained by SLB bond issuances are not linked to specific projects or programs, but to the general income of the nation, unlike green, social and sustainable bonds. On the other hand, if the issuer does not reach the specific targets established in the bond, the cost of the debt will rise. This financial mechanism serves as an incentive for the government.

vi) What are the Key Performance Indicator(s) selected by Chile? What was the rationale behind KPIs?

The selection of KPIs follows the environmental objectives set by Chile’s updated NDC and, therefore, it is coherent with Chile´s strategy of development.

Chile has selected two KPIs, the first addressing Chile’s NDC mitigation commitments for greenhouse gas emissions reduction, and the second considering the percentage of total generation in the National Electric System sourced from Non-Conventional Renewable Energy.

KPI 1 will be measured through the National Greenhouse Gas Inventory, administered by the Climate Change Office of the Ministry of Environment and published on a biennial basis. The emissions inventory covers the entire national territory, and in keeping with IPCC guidelines, includes emissions from the Energy, Industrial Processes and Product Use, Agriculture and Waste sectors.

GHG emissions are the main indicator to quantify the contribution to climate change. Therefore, it is the main measure to determine how much to reduce our incidence on global warming. Behind this indicator lies a wide variety of policies, and their effectiveness in terms of mitigation can be translated and compared with this measure. The most relevant commitments established in the NDC, according to what is signed in the Paris Agreement, are measured in MtCO2e.

KPI 2 will be measured as the percentage of total generation in megawatt-hours provided from non-conventional renewable energy sources – namely wind, small run-of-river hydro (up to 20 megawatts of installed capacity), biomass, biogas, geothermal, solar and ocean energy, and green hydrogen. The KPI, which covers Chile’s entire energy grid, will be published through the monthly energy report by the National Electric Coordinator.

vii) What kind of energy sources are included as non conventional for the purposes of the KPI included in the Framework?

NCRE refers to energy coming from the following sources: wind, small run-of-river hydro (plants up to 20 MW of installed capacity), biomass, biogas, geothermal, solar and ocean energy, and green hydrogen. Non-conventional excludes hydropower plants such as reservoirs or run-of-river over 20MW capacity because of its social and environmental impact.

viii) What are the Sustainability Performance Targets (SPTs) selected for each KPI?

In its SLB Framework, Chile has included the following SPTs

SPT 1:

1. To reach annual emissions of 95 MtCO2e by 2030, and
2. b) To maintain a total carbon budget that does not exceed 1,100 MtCO2e over the eleven years from 2020 through 2030. These targets are based on Chile’s 2020 NDC mitigation commitments. The observation date for both will be December 31st of 2030, with a reporting date no later than December 2033, in line with current NDC protocol.

SPT 2:

a) To reach 50% of electric generation derived from non-conventional renewable energy sources by 2028, and

b) 60% by 2032.

ix) What was the rationale behind the GHG SPT selected? How does this align with the Paris Agreement and with a well-below two degrees temperature scenario? 

The mitigation target is the same presented in the 2020 NDC and was formulated in accordance with scientific recommendations and the mitigation requirement established in the Paris Agreement’s objectives. 

Sustainalytics considers the SPTs to align with Chile’s sustainability strategy and commitments, and considers Chile’s SPT 1 to be ambitious given its improvement against past performance and its trajectory consistent with science-based targets for GHG emissions for limiting global warming to below 2ºC.

x) What was the rational for the Energy SPTs selected? What efforts will Chile need to undertake to achieve these targets?

In recent years, Chile has achieved substantial growth in NCRE, which has opened a new chapter in Chile’s energy history. Generation technologies from NCRE, such as solar photovoltaic and wind power, have become more competitive than conventional generation technologies, such as coal, natural gas and hydroelectric plants. This is primarily due to significant decreases in investment costs, modularity of projects and shorter development times. Among the factor that support the achievement of this SPT, are included:

• Strong commitment through Chile’s government and public policy and initiatives to increase the proportion of electric generation derived from NCRE.
• Support from the technical teams at multinational institutions.
• Increased availability of renewable energy sources.
• Investments in increasing renewable energy infrastructure.
• Investments to increase renewable energy supply and generation, such as green hydrogen, electromobility, and solar/wind power plants.
• The phase-out of conventional fuel sources, such as coal.

We also view this SPT as a critical step towards achieving our climate ambitions, given that the energy sector accounts for the majority of Chile’s GHG emissions.

IV. Reporting

i) How frequent the reporting will be?

There will be an annual report, to be published in June of each year, with the latest information available. In addition, there will be ad-hoc reports to inform the results of the targets.

ii) What is the reporting lag for GHG emissions? Can you explain why it is this long? How does this affect the implementation of any penalty associated with the SPT?

The GHG emission report is biennial, produced with a lag of 2 years. The timing is explained by the complexity of the calculation, as well as the different entities involved.

In addition, up to 1 additional year is needed for the verification process executed by the technical experts of UN.

Thus, if the SPT was achieved or not in 2030, will be fully determined 3 years after the observation date, in 2033.

iii) What is the reporting lag for KPI2? How does this affect the implementation of any penalty associated with the SPT?

The lag is 1 month. Data to confirm SPT 2 has been met will likely be available February/March 2033; we expect the information to the Trustee will be reported on March 2033.

iv) How will the result of the SPTs on the observation date(s) be reported and announced?

There will be ad-hoc reports informing if the targets were achieved or not, which will be published on the Ministry’s webpage.

V. SPO and Assurance

i) What is the role of Sustainalytics?

Sustainalytics was hired as SPO Provider. Chile engaged Sustainalytics to review the SLB Framework and provide an opinion on the alignment of the linked instruments with the Sustainability-Linked Bond Principles (SLBP). Thus, Sustainalytics’ Second-Party Opinion reflects its opinion on the alignment of Framework with the SLB Principles 2020, as administered by ICMA.

As part of this engagement, Sustainalytics exchanged information with various members of the Public Debt Office of the Ministry of Finance to understand the country’s climate goals and SPTs, as well as reporting and verification processes of aspects of the Framework.

ii) What was Sustainalytics’ overall conclusion on the strength of the KPIs and the ambition of the SPTs?

Sustainalytics considers KPI 1 to be very strong as a direct measure of performance on a material sustainability issue with a clear and consistent methodology, and a high scope of applicability. KPI 2 is considered strong based on an indirect measure of performance on a highly material issue and a high scope of impact on GHG emission reductions in Chile.

Sustainalytics considers SPT 1 to be ambitious as it represents an improvement on previous performance and is associated with a below 2 degrees C warming scenario.

SPT 2 is considered highly ambitious given it exceeds past performance and is above science-based targets that would lead to a net-zero trajectory by 2050.

Furthermore, Sustainalytics considers reporting and verification commitments to be aligned with market expectations.

Thus, Sustainalytics considers the SLB Framework aligned with the five core components of the Sustainability-Linked Bond Principles 2020 and the prospective of achievement of the SPTs to be impactful.

Public Debt is any financial obligation (such as bonds or loans) assumed by the government, where it agrees to make interest and principal payments on certain dates.

Public or government debt includes the debt of the Department of the Treasury, the Central Bank and Corfo. There is also foreign debt related to sovereign bonds issued abroad, and government notes in US dollars the government owes the Central Bank, and notes issued by the Central Bank (PRC, BCP, BCU, and BCD, among others).

The debt instruments included under the Central Government Gross Debt are the bonds issued in the local and foreign market as well as the credits with multilaterals (such as the IMF, World Bank among other) and credits, debts or other credit instrument recognized by a particular law. The debt instruments mentioned above are considered under the Central Government Public Debt concept according to the IMF’s definition in the 2014 Government Finance Statistics Manual. These debts are registered in its notional value and are adjusted according to its currency. Thus, to publish the debt in pesos, the inflation-linked debt is readjusted according to the variation of the UF (Unidad de Fomento), and the foreign currencies debt according to the exchange rate corresponding to the report date.

The methodology used since 2001 to calculate the Central Government Net debt, which is quarterly reported in the Report on Public Debt Statistics, is the Gross Debt minus the Financial Assets, both of the Central Government.

1. The Gross Debt is informed and registered by the Treasury (for more details, please read the question above).
2. The Financial Assets are provided by the General Comptroller of the Republic, which registration system is nurtured by different departments registered in the Financial Management Integrated System of the State (SIGFE, in Spanish).

 Thus, it includes Public Treasury investments and other asset lines from departments of the Central Government:

• Public Treasury:

o   Sovereign Wealth Funds (FEES and FRP).

o   Other assets of the Public Treasury (OATP, in Spanish, and correspond to seasonal cash surpluses of the Public Treasury).

o   The Fund for Education (FpE, in spanish, created by the Law Nº20,630).

o   The Fund for Diagnosis and Expensive Treatments (TAC, in Spanish, created by the Law Nº20,850).

o   The Fund for Regional Support (FAR, in Spanish, created by the Law Nº 20,378).

•  Other Investments:

o   Current accounts, from resources of different Central Government departments, which are pending to being executed or expended. In the case of current accounts and available resources, the names of each item included in the spreadsheet provided by the Comptroller are: Banco Estado, Caja and Bancos del Sistema financiero.

o   Equity and capital participation, which correspond to the historic capitalization of the Fisco in public enterprises, inflation adjusted. For instance, the capital transfers to Codelco are registered in this item.

o   Short-term investments in several Central Government departments, different from Public Treasury, in which is included the state-backed credits to finance higher education that the State have had to buy.

o   Loans of a different nature, which usually represent a relatively smaller amount (social assistance, mortgages, pledges, etc.).

 To calculate the Net Financial Position, which is reported quarterly in the Public Finance Report of the Budget Office, only the investments of the Public Treasury must be considered and the Gross Central Government debt must be subtracted.

The International Finance Unit of the Finance Ministry is in charge of proposing and implementing strategies regarding public debt through the Public Debt Office.

The purposes are:

(a) to develop and maintain an efficient and high-quality bond market, establishing referential rates for the local financial market and local businesses;

(b) to encourage the participation of foreign investors in order to achieve financial integration of our economy with international markets; and

(c) to ensure the financing needs of the government and reduce long-term financing costs given prevailing risk.

The government issues peso- and UF-denominated bonds in the domestic market. These issues provide referential real and nominal interest rates for other domestic debt.

The outstanding bonds are available in te following link.

Yes, the bank could also issues bonds. Both the bank and the Ministry of Finance coordinate periodically to plan the debt issuances.

The annual maximum amount of debt that the government is allowed to contract is determined in the annual budget law. Under this authorization, the government issues dematerialized bonds through the General Treasury of the Republic. 

Operationally, there are several options for the debt issuances. Lastly, the most commona re:

- Through the Central Bank, acting as Fiscal Agent, in periodical bond auctions in local curency, in the dates and by the amounts previously established by the Ministry of Finance.

- Through book-building, in which could participate both local and foreign investors, whose participate through the underwirter banks specially hired for this. This option is ised both for local currency denominated bonds as well as for external bonds.

In the auctions made through the Central Bank, all the SOMA participantes (Open Market Oprations System, by its Spanish acronym), which in general include: banks, mutual funds, pension funds, and insurance companies.

For the rest, could participate all kind of institutions, both in Chile and abroad.

Information on the auctions can be found on the Websites of the Ministry of Finance  and of the Chilean Central Bank. In the case of the Minsitry of finance, the information is in the following link.

The government has been issuing bonds in the local market since 2003 and sovereign bonds in foreign markets since 1999.

The calculation convention for the secondary market is ACT/365 (end of period). 

However, the coupon payment is calculated with a 30/360 (end of period) convention. Therefore, semiannual coupon payment is always the same: nominal amount *coupon rate/2. The bonds are bullet, thus capital is paid at maturity.