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Uruguay launches sovereign bond linked to climate goals – Global issues

As green bonds continue to grow, Uruguay will be the first country in Latin America to borrow with interest rates tied to the fulfillment of climate commitments.
Construction of wind turbines near Tarariras, in the Colonia department of Uruguay. Nearly all of the nation’s electricity comes from renewable sources, but its governments are exploring new financial instruments, such as sovereign green bonds, to help other sectors in the process. convert to net zero. (Photo: Picardo Photography / Alamy)
  • by Fermin Koop (broadcast buenos)
  • Joint press service

Although their purposes may be different, these bonds do share certain characteristics. A company or government that takes on debt and these funds must be used exclusively to meet a specific environmental or social goal, such as developing clean transportation infrastructure, expanding energy renewable or meet the Sustainable Development Goals.

However, with the development of sustainable finance, new and even more innovative types of debt instruments have emerged, such as 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 cover various initiatives and with variable interest rates. .

This rate will depend on whether Uruguay meets a previously established environmental target, such as country-determined contribution (NDC) with the Paris Agreement. In other words, if a country reduces emissions as promised, it will be rewarded with a lower rate. And if it fails to comply, it will be fined with a higher rate.

So far, the only country that has developed such an instrument is Luxembourg, which issued $1.5 billion in debt in 2020. According to Uruguay’s environment minister, Adrián Peña, the country’s bonds will be worth between $800 million and $1 billion, yet exact release date.

Developing countries like Uruguay are particularly vulnerable to the climate and biodiversity crisis, and need financial support to meet their environmental or climate commitments. This is where sustainable finance comes in, as a tool to support their economic transformation.

Sustainable Finance in Latin America

Sustainable finance mechanisms continue to grow more and more diversified. For example, Argentina and Colombia have recently called for an expansion Debt swap for nature, a tool has been used that will allow them to reduce their debt and also achieve their environmental goals. Elsewhere, financial experts have pushed the creation of new musical instruments such as the bond currently proposed by Uruguay.

“Debt swaps were very popular decades ago. But now the picture has changed a lot. Jochen Krimphoff, WWF head of green government bonds, said it would be more complicated about who holds the debt and how it is traded. “In the long run, the more sustainably you manage your natural resources as a government, the more sustainably your economy can grow.”

Green sovereign bonds demonstrate a country’s commitment to sustainable growth strategies and low greenhouse gas emissions, which can stimulate private sector investment in green initiatives. It can also enable more effective cooperation between different areas of government, as Peña has shown.

“It seemed to us that we had a lot of knowledge to send to the Treasury Department, which didn’t know too much about our problems. That is where the idea of ​​the bond comes from,” the minister told Diálogo Chino.

In 2019, Chile became the first country in Latin America to issue sovereign green bonds, having raised $7.44 billion in consecutive issuances to date. The country has also issued social and sustainable bonds, as have Ecuador, Mexico and Guatemala, according to Climate Bonds Initiative.

The energy and transport sectors benefited the most from the financing, as did the land use sector. In the case of Chile, the funds from its green bonds have gone towards promoting clean transport, such as Santiago’s electric bus and build new subway lines.

“There are a lot of investors who want to invest in these instruments,” said Pablo Cortinez, a sustainable financial advisor. “The fiduciary obligations and profiles of investors are changing, and more and more people are calling themselves green. The largest economies in the region, such as Brazil and Argentina, should bet on green sovereign bonds.”

For Marcela Ponce, Latin American climate finance team leader at International Finance Corporation, 2020 is a landmark year for green sovereignty issuance and 2021 is not far away. She added: “Since COP26, finance ministries in Latin America have shown a strong desire for the green bond market.

New Uruguayan Bond

Unlike Chile, Uruguay will not issue green bonds as the money can be used for any desired purpose. However, by linking the bond’s interest rates to the NDC, the government will create more incentive to direct financing towards initiatives that help it achieve its climate change goals.

Uruguay paid Its NDC in 2017, in which it proposed carbon-per-gas intensity reduction targets for three specific gases: carbon dioxide, nitrous oxide, and methane, with reductions of 24%, 48%, and 57%, respectively, by year 2030, on an unconditional basis. A new NDC is expected to be filed in 2022.

About 70% of Uruguay’s greenhouse gas emissions come from the agricultural sector, two-thirds of which comes from beef production, according to the report. most recent emissions inventory. The government hopes that better pasture management emissions will be significantly reduced.

“Uruguay is incurring a high political cost with its new sovereign bonds. But if it succeeds, it will be an important milestone for the region,” said Sebastián Ramos, partner in the banking and finance division of Ferrere, a law firm in Montevideo. “The learning curve is very high, as it is the first in the region with this type of sovereign bond.”

Juán Giraldez and Stephanie Fontana of the international law firm Cleary Gottlieb described The debt instrument that Uruguay wants to promote becomes the “next frontier in sovereign finance”. However, they also highlight risks and challenges due to its novelty, and which has so far only been developed by Luxembourg.

For bonds to be successful, governments must be able to explain to their investors the choice of a specific target for which interest rates are fixed, more than other possibilities – NDC, in the case of Uruguay . In addition, the goal must be achieved over the lifetime of the relationship, and a third party responsible for monitoring the actual achievement of the goal must be identified.

“With the relationship we are designing, Uruguay will have a mandate to take care of the environment and reduce carbon dioxide emissions,” said Uruguayan Economy Minister Azucena Arbeleche. an interview. “Investor and issuer incentives will match the performance of a given index.”

Further details on Uruguay’s sovereign green bonds, including an initial issuance date, are likely to be confirmed as early as 2022. Supporters of these instruments will hope that, if successful public, it could be a catalyst for their growth and attraction in Latin America, which could drive a sustainable transition across the region.

This article was originally published by Chinese Dialogue

© Inter Press Service (2021) – All rights reservedOrigin: Inter Press Service

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