Leveraging additional finance to support the sustainability goals is crucial to address the financial gap for climate and biodiversity challenges in Latin America and the Caribbean. The Inter-American Development Bank is committed to supporting its member countries in achieving their ambitions under the Paris Agreement and the Montreal-Kunming Global Biodiversity Framework, and structuring innovative financial mechanisms is fundamental to ensuring that national plans are funded.
In this sense, the Bridgetown Initiative is fostering the need for a reform of the financial system so as to increase access to concessional lending for developing countries, create a new facility to accelerate private low-carbon investment and enhance adaptation finance by expanding resources and by normalizing the inclusion of disaster and pandemic clauses in all lending instruments.
The IDB is a recognized leader in the development of the Sustainable Finance Capital Markets of Latin America and the Caribbean, and a global key player, supporting growth, transparency, efficiency, and fairness of these nascent markets. Since 2016, the IDB has developed a holistic advisory program that has supported 14 public sector issuers (of which 5 are sovereigns) to access the opportunities offered by the Sustainable Finance Market – issuing labeled bonds for a total of USD 35 billion, accounting for more than 25% of the overall regional market. At the same time, with a coalition of partners, IDB has developed the Green Bond Transparency Platform, collecting impact reports and indicators from more than 200 bonds issued in LAC to date, fostering transparency and confidence in this nascent market.
Last year, two transactions took place, which have been recognized internationally by both financial and environmental peers as groundbreaking transactions. Both are now serving as models for other countries, and the IDB is seeing increased demand for these products. Using IDB’s financial products, such as policy-based guarantees in new ways, to support countries in their development pathways is vital to optimizing MDB balance sheets and modernizing the international financial system. We hope to see many more similar transactions.
The Case of Barbados: A Debt for Nature Transaction is Elevating the Game
In September 2022, the Government of Barbados structured a Debt for Nature transaction, supporting a marine conservation agenda that intends to protect up to 30% of Barbados’ ocean, build ocean governance, and capitalize a new conservation trust fund. By valuing and building a strong blue economy agenda, the Government of Barbados was able to manage sustainably its debt, as they repurchased USD 77.6 million of international debt for 6.625% 2029 Eurobond at a price of 92.25 cents on the dollar and USD 72.9 million (BBD 145.8 million) of 8% Domestic Bond Series E at par. The IDB supported the transaction with a guarantee of USD 100M, which included the hurricane and pandemic clauses and a policy matrix with triggers that reinforced financial and policy changes by both the Ministry of Finance as well as the Ministry of Environment and National Beautification, including the creation of the Barbados Environmental Sustainability Fund (BESF), blue economy governance, sustainable debt management strategy, etc. The Nature Conservancy was a partner in this process, with a USD 50M guarantee.
For the next steps, Barbados is receiving the support of the Bank through technical assistance that is building out the components of the Marine Spatial Planning (MSP) process that underpins the conservation commitments, and that will support a draft of the Ocean Policy.
The Case of Uruguay: An Innovative Financial Instrument is Raising the Countries Ambition
In October 2022, Uruguay issued a pioneer finance instrument: the first sovereign sustainability-linked bond in the world to include a step-down mechanism that is activated upon the achievement of environmental targets tied to the country’s nationally determined contribution (NDC) to the Paris Agreement. The IDB worked with Uruguay’s Ministry of Economy and Finance (MEF) in preparing the framework for this bond, which is a clear indication of the MEF’s determination to align the country’s sovereign debt policy with its climate goals.
The issuance attracted 188 investors from Europe, Asia, the United States, and Latin America, of whom 21% are new holders of Uruguayan debt. The total demand for the bond was USD 3.96 billion, greatly exceeding the USD 1.5 billion Uruguay decided to issue.
This bond issuance is the product of a substantial multidisciplinary and inter-ministry effort and reflects the country’s ongoing commitment to multi-sector work on climate action, which we have proudly supported throughout the years.
It is key to underline that the success of these cutting-edge transactions will also rely on the long-run impact and achievement of the milestones under which the Governments have committed to attain under their sustainability agendas. In this context, governance will play a key role in building the capacity of the national stakeholders within the government and civil society. This will enable the possibility to replicate these transactions as well as increase their ambition over time.
Further reading: the IDB recognized in Environmental Finance:
- Highly commended, sustainability-linked bond of the year: Blue Bond for Ocean Conservation for Barbados
- Uruguay Created the First Sovereign Sustainability-Linked Bond (SSLB)