Climate trailblazers

Uruguay emerges as climate finance pioneer with bond linked to climate change indicators.

Uruguay recently became the second country in Latin America to issue a Sustainability-Linked Bond (“SLB”), after Chile. Montevideo sought to test investor interest in tying the interest rate on the bond to sustainability goals. The framework for issuing the bond was prepared alongside the Inter-American Development Bank (“IADB”) and attracted 188 investors from Europe, Asia, US, and other Latin American countries.

The bond has a step-up coupon if the country underperforms on two key performance indicators and a step-down coupon if the country over performs on those indicators. These indicators are 1) GHG emissions per unit of real GDP, and 2) estimated Native Forest area relative to a 2012 measurement.

An executive from the Climate Bonds Initiative praised Uruguay’s government on its approach to the bond issue, “I’m impressed with Uruguay, it is challenging for governments to commit to targets which they cannot fully control, as the private sector accounts for a large part of the sustainability performance, even when adequate public policies might be in place. Particularly in this case, the targets have a very broad scope (reduction of GHG and conservation of native forests), compared to other KPIs like renewables installed capacity.”

“It is challenging for governments to commit to targets which they cannot fully control, as the private sector accounts for a large part of the sustainability performance.”

Executive, Climate Bonds Initiative

The total demand for the bond reached USD 3.96 billion, exceeding the USD 1.5 billion target that Uruguay’s Ministry of Finance expected to issue. Sustainable financing in Latin America continues to gain momentum, the innovative aspect of this bond is that the funds will not be designated for a specific purpose, as they will finance different initiatives at a variable interest rate. The National Determined Contribution to the Paris Agreements, established by United Nations Climate Action, will determine whether the country meets the environmental targets.

Clearly, the Uruguayan government believes it can deliver against the targets, an ESG performance analyst shared the optimism, “Uruguay is already performing strongly against the bond’s KPIs: GHG emissions are declining, and native forests have been expanding. The country’s plan to achieve these targets has five dimensions: renewable energy development, transport decarbonisation, energy efficiency, sustainable agriculture and forested land protection.”

“Uruguay is already performing strongly against the bond’s KPIs: GHG emissions are declining, and native forests have been expanding.”

ESG performance analyst

Despite the high levels of investor interest in Uruguay’s issue, Bloomberg News revealed that investors are growing more sceptical of sustainability-linked bonds. An analysis of 100 SLBs worth EUR 70 billion by global companies to investor showed that climate targets tend to be weak, irrelevant, or already achieved.

In the case of Uruguay, the support of the IADB is crucial due to its proven track record of financing green markets and SLBs. Following Chile’s USD 2 billion SLB issuance in early 2022, new actors such as regional governments and municipalities are expected to continue issuing similar products. However, question marks remain over how the market will react to SLBs issued by more politically unstable actors.

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