Uruguay launches sovereign bond linked to climate targets

Sustainable finance continues to expand in Latin America, as governments and companies take advantage of growing interest among investors in instruments that protect biodiversity and respond to the climate crisis. In 2020, more than USD 16 billion of green, social, and sustainable bonds were issued in the region.

Though their purpose may vary, these bonds share similar characteristics. A company or government takes on debt, and these funds must be used exclusively to meet a specific environmental or social goal, such as developing clean transport infrastructure, expanding renewable energy, or meeting the Sustainable Development Goals.

However, with the growth of sustainable finance, new and even more innovative types of debt instruments have emerged, such as one now proposed by Uruguay. The government of President Luis Lacalle Pou is working on a bond whose funds will not be designated for a specific purpose, but will instead pay for different initiatives, and at a variable interest rate.

This rate will depend on whether Uruguay meets a previously established environmental target, such as its nationally determined contribution (NDC) to the Paris Agreement. In other words, if the country reduces its emissions as committed, it will be rewarded with a lower rate. And if it does not comply, it will be penalized at a higher rate.

So far, the only country to have developed such an instrument has been Luxembourg, which issued USD 1.5 billion in debt in 2020. According to Uruguay’s environment minister, Adrián Peña, the country’s own bond will be for an amount between USD 800 million and 1 billion, with no exact date for its issuance yet set.

Developing countries like Uruguay are especially vulnerable to the climate and biodiversity crisis, and need financial support to...