Late last year, Thailand did something remarkable. The country’s government approved a new Nationally Determined Contribution (NDC), committing to reduce its net greenhouse gas emissions by nearly half by 2035 compared to 2019, and bringing forward its net zero target by 15 years to 2050. In times when climate pledges are often cautious and hedged, this is a statement of intent.
From a risk management perspective, the question is now no longer whether economies should decarbonise, but how. This raises the key issue, how should that transition be financed? For Thailand, as for most countries in the region, this matters enormously.
Delivering on its ambitions will require higher investment across the economy, particularly in the energy and transport sectors. Governments and capital markets will need to play a central role. An urgent and underexplored question is whether government bonds markets can be structured to make Thailand’s transition faster, cheaper, and more credible.
This is where performance driven bond structures can make an impact.
Thailand has a head start. In 2024, it became the first Asean government to issue a Sustainability-Linked Bond (SLB) – an instrument where the interest rate paid by the government adjusts depending on whether it meets pre-agreed climate targets. This bond is now the largest of its kind globally, and its importance should not be understated. For the first time, Thailand’s borrowing costs have been tied, however modestly, to specific climate targets: the country’s greenhouse gas emissions and registrations of new zero-emission vehicles. The finance and environment ministries have been, in effect, working toward the same goal.
The SLB is best understood as a first step rather than a final destination. Recent research published by the Anthropocene Fixed Income Institute found that the financial incentive embedded in the structure is limited in practice as the potential interest payment adjustments that are linked to its target delivery are relatively small. That is not a reason to dismiss the instrument, but a reason to think what could come next and how to make bond structures financially more material.
A more ambitious possibility is what we call a “transition linker”. In such a structure, the coupon adjusts in several steps if the government under- or outperforms relative to its decarbonisation targets. If decarbonisation accelerates, the government’s cost of capital falls. If it stalls, investors are compensated for the increased risk of holding Thai government debt.
In essence, the instrument sets a strong incentive for decarbonising the economy, while providing investors a hedge against a failed transition. As such, it aligns the interests of borrowers and investors, with the climate transition at its core.
Financial innovation must match policy substance
The potential appeal for Thailand is significant. A credibly structured transition linker could lower government borrowing costs at a time when the country faces substantial green investment needs. For investors, increasingly exposed to climate-related risks across portfolios, it offers something rare: a fixed-income instrument that pays more precisely when a transition failure would be most damaging to their other holdings.
The investor case rests on a specific, and increasingly mainstream, portfolio hypothesis: that a failed energy transition would result in lower and more volatile returns on risky assets. A transition linker acts as a hedge by paying out more when a government’s decarbonisation progress lags behind its ambitions. It is not merely a sustainable investment; it is a risk management tool. Similar to inflation-linkers which hedge against inflationary policies.
A transition linker tied to NDC targets would also serve another purpose: a measure of policy credibility based on market pricing. As the bond’s pricing implies a real-time probability of the country hitting its decarbonisation milestones, it creates a live, publicly visible indicator of transition credibility. Policymakers, investors, and the public alike would be able to observe the market’s assessment of whether Thailand is on track.
The broader stakes are hard to overstate. Southeast Asia is among the world’s most climate-vulnerable regions. The region also is at a pivotal point in the energy transition: growing fast, often still heavily dependent on fossil fuels, and in urgent need of green investment that does not lock in decades more of carbon-intensive infrastructure.
Thailand’s NDC ambition, if matched by the right bond instruments, could therefore offer a template for the region. Other Asean governments watching Bangkok will note not just whether the targets are met, but whether the bond structures that accompany them prove workable. While other countries are developing their sustainable debt markets, none has yet attempted to tie government borrowing costs as explicitly to national climate commitments as Thailand.
For this to work, however, the financial innovation cannot outrun the policy substance. The credibility of any NDC-linked instrument rests on decarbonisation progress and therefore the quality of the underlying emissions data, the independence of verification, and the seriousness of the targets themselves. As Thailand’s emissions are still rising, the NDC 3.0 is a genuine step forward. But it will need to be accompanied by credible sectoral policies, a shift away from fossil fuels towards renewable energy, and transparent reporting.
That is the hardest part – and no bond structure can substitute for it. What a well-designed transition linker can do is create the financial conditions in which delivering on those policies becomes not merely morally necessary, but economically advantageous. It turns climate commitments from ambitions into market pricing with economic benefits attached.
Thailand was the first country in the region to issue an SLB in 2024, which is now the largest of its kind globally. Issuing a transition linker would underpin its role as a trailblazer in NDC-linked bond structures, combining decarbonisation progress with bond pricing.
Jonas David is research director at Anthropocene Fixed Income Institute, a non-profit research organisation that studies how fixed income investments can deliver positive climate and biodiversity impact. He develops research and insights on the role of fixed income markets in the climate transition, with a focus on key sectors, sovereigns and development finance.
