Uruguay has positioned itself as a world leader in sustainable debt issuance by innovating in investment instruments that are subject to environmental indicators. In the face of a “paradigm shift” in the financial world, how did it do it?
Over the past four years, interactions with investors have changed, with increased emphasis on environmental and social awareness. Investors no longer ask only about Uruguay's fiscal deficit, employment and balance of payments when purchasing its debt instruments, but now also talk about the country's climate policies.
Thus, in 2022, Uruguay set out to issue its first Green Bond, i.e. debt securities whose interest rate has environmental indicators as binding aspects, and which it then expanded in November 2023.
With the Climate Change Indicator Indexed Bond (BIIC), Uruguay made a commitment to reduce the intensity of greenhouse gas emissions per unit of real Gross Domestic Product (GDP) and to maintain the area of native forest. This bond establishes that if the country fails to comply with the commitments assumed, the interest rate it will pay to investors will increase and if it complies, the coupon remains fixed, neutral (something that other countries had already done); but the innovative (and pioneering) part is that if it exceeds these objectives, the interest rate it must pay will be lower (step down in financial jargon).
This debt instrument is tied to two indicators: 1) reducing greenhouse gas emissions by 50% by 2025 (compared to 1990, in carbon dioxide per unit of real GDP); 2) maintaining 100% of the area of native forests by 2025 (compared to what it was in 2012).
If Uruguay meets the targets, the interest rate remains the same. If it fails to meet them, 15 basis points are added for each indicator not met. If instead of reducing by 50%, it reduces indicator 52 by 1% and increases indicator 3 by 2%, 15 basis points are subtracted for each “over-met” indicator. The evaluation of these indicators will be done in October 2027.
Source: El País
