Uruguay’s new financial instrument to combat deforestation references Planet Tracker’s recommendations

Planet Tracker’s innovative report A Deforestation Linked Sovereign Bond recommended a Deforestation-Linked Sovereign Bond (DLSB) to help countries with valuable state-owned forests to fund their transition to a sustainable economy by linking coupon payments to success in reducing deforestation as part of the solution. The report promoted awareness among policymakers and the media of Deforestation-Linked Sovereign bonds (DLSB). These financial instruments are an innovative way to incentivise governments to target reduced deforestation while raising money.

Uruguay was the first nation to issue a DLSB. Their framework for a Deforestation-Linked Sovereign Bond (DLSB) referenced Planet Tracker’s research and used the structure Planet Tracker recommended in its July 2021 report. The Uruguay framework links sovereign bond coupons to 2 KPIs: climate and deforestation. As we suggested in our report, the coupon steps up if either target is missed but steps down if either target is met.

The fact that a sovereign bond issuer has followed our recommendations clearly demonstrates the viability of our proposed deforestation-linked sovereign bond structure. We continue to advocate for other governments striving to limit deforestation (e.g. Brazil) to consider this financial instrument as part of their toolkit.