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Innovative financial mechanisms for forests conservation: Sovereign Sustainability-linked bonds & debt-for-nature conversions.

Blog | Tue, 16 Apr, 2024 · 15 min read

The world is facing a triple planetary crisis of pollution, climate change, and biodiversity loss. In addition, the impacts of the COVID-19 pandemic on the economic systems have accelerated a sovereign debt crisis, limiting the ability of governments to address not only economic and social challenges but environmental ones, including deforestation and forest degradation. 

Leveraging alternative and additional finance to support forest conservation is crucial to address the financial gap for climate and biodiversity challenges globally and predominantly in tropical forest countries that constitute significant carbon sinks. This article explores two recent cases of the relevance of financial instruments in the context of the Latin America and Caribbean region that have showcased that innovative finance is an applicable pathway for forest financing.   

Sovereign Sustainability-linked bonds (SSLBs) for forest conservation 

Taking the leadership in aligning Uruguay’s fiscal policy to environmental policy, in 2022, the government issued a $1.5 billion outstanding 5.75% Sovereign Sustainability-linked bond (SSLB)1 due 2034 with a price linked to their National Determined Contribution (NDC) regarding reducing Green House Gas (GHG) emissions and promoting forest conservation. In 2022, the total demand for the bond was $3.96 billion, exceeding the $1.5 billion that the Government of Uruguay decided to issue2.  A further issuance of $700 million 5.75% took place in 20233.  

Specifically, the bond set as one of its key performance indicators (KPI) 4 to maintain 100 % of the native forest area (849,960 ha) with respect to reference year (2012) (in %) by 2025.  

The bond entails an incentive mechanism (a step-up/step-down coupon rate structure - if the specified KPI is not achieved, the issuer will be subject to a step-up in the coupon rate on the bond; and vice versa - if the specified KPI is achieved, the issuer will be subject to a step-down in the coupon rate on the bond). The following environmental targets in relation to forest cover were set5. 

  • KPI Target 2.1: Maintain at least 100% of the Native Forest area estimated for 2012 by 2025. Translated in a step-up coupon of 15 basis points (bps) if failing to reach KPI Target 2.1, meaning a 5.9% coupon rate (if considering only Target 2.1) 

  • KPI Target 2.2: Achieve an increase higher than 3% in the Native Forest area by 2025 compared to reference year 2012. Translated in a step-down coupon of 15 basis points (bps) if outperforming to reach KPI Target 2.2, meaning a 5.6% coupon rate (if considering only Target 2.2) 

Noting that if the targets do not fail nor outperform the coupon will remain the same.  

The 2023 SSLB Annual Report concluded that the KPI Target 2.1 is on track towards 2025. The country reached 100 percent maintenance of native forest area by 2021, with respect to the baseline. In fact, compared with 2016, native forest cover increased 11,832 ha. (approx. 1.4%)6.  

Despite native forests are protected by law, they are exposed to degradation, deforestation and biodiversity loss because of illegal logging for firewood. Additionally, the opportunity cost of not exploiting native forests has increased due to an increasing price of land derived from a growing land demand for agricultural use7.  

Thus, reaching KPI Target 2.2 will require significant effort. Active policies are incentives to promote reforestation and expansion of protection areas, promotion of carbon sequestration in the agricultural sector, enhancement of carbon stocks and promotion of native forest management8.   

Debt-for-nature conversion 

In 2023, the Government of Peru signed an agreement with the United States that will redirect in the next 13 years, $20 million of bilateral debt obligations into conservation efforts in Peru. The negotiation is aligned to Peru’s NDC which emphasizes the role of the forest sector in the Peruvian amazon as key climate mitigation source9.  

The Debt Swap Agreement, the third swap of these type between the parties, in the context of the 1998 Tropical Forest and Coral Reef Conservation Act (TFCCA) which seeks to support developing countries with a tropical forest10 was made possible through contributions of $15 million by the U.S. Government and a combined donation of $3 million (each group providing $750,000) from four non-governmental organizations—Conservation International (CI), The Nature Conservancy (TNC), Wildlife Conservation Society (WCS), and World Wildlife Fund (WWF)11.  

The swap meant that the debt or loans or portion thereof resources that once went to the U.S. Government for debt repayments were cancelled and remain in the Peruvian economy. According to the TFCCA the resources shall be used for:  

  1. Establishment, restoration, protection, and maintenance of parks, protected areas, and reserves,  
  2. Development and implementation of scientifically sound systems of natural resource management, including land and ecosystem management practices,  
  3. Training programs to increase the scientific, technical, and managerial capacities of individuals and organizations involved in conservation efforts,  
  4. Restoration, protection, or sustainable use of diverse animal and plant species,  
  5. Research and identification of medicinal uses of tropical forest plant life to treat human diseases, illnesses, and health related concerns,  
  6. Development and support of the livelihoods of individuals living in or near a tropical forest in a manner consistent with protecting such tropical forest”12.  

     TFCCA (1998).  

In the case of Peru, these funds will be used to support the Peruvian System of Protected Areas which supports the conservation of some 16 million hectares through the Project Finance for the Permanence Project (PFP) of the National Heritage of Peru. The project will protect areas with the highest concentration of biodiversity in the northern, central and southern jungle of the country, in the regions of Loreto, Ucayali, Huanuco, Junin, Pasco, Cusco, Madre de Dios, and Puno13.  

The Peru – United States Debt Swap Agreement exemplifies the emergence of the swap concept in the 80s and 90s as a partial debt relief operation conditional on debtor commitments to undertake climate/nature-related investments.  

However, in the recent reemergence of the swap model, the focus has shifted towards encompassing commercial debtors. In a commercial debt-for-swap arrangement, the focus is on refinancing commercial loans, which are typically obtained through International Sovereign Bonds (ISBs), meaning private creditors or bondholders. 

Given that commercial loans are generally considered the priciest form of sovereign debt, with higher interest rates, and shorter tenor periods compared to bilateral or multilateral debt agreements; the savings or the proceeds and the extent of debt relief achieved through a commercial debt swap may be greater than those achieved through bilateral debt swaps.  

Both Uruguay’s novel and Peru’s growing direction towards the use of innovative financial mechanisms for forests conservation represents a breakthrough for countries advancing in forest conservation as a mitigation measure within their NDCs. As forests are underfunded not only in Latin America and the Caribbean (LAC) but globally, these innovative financial instruments, in many cases paired up with risk mitigation tools as a mean to address developing countries macroeconomic challenges, represent a tangible opportunity to mobilize and unlock public and private long term sustainable finance for forests. UNEP within the UN-REDD Programme is engaged in providing technical assistance to governments to access to alternative financial sources and explore alternative financial instruments to advance on forests conservation efforts.   

This article emerged in the context of the XII Ibero-American Conference of the Ministries of Environment. The conference was held on 7th February 2024 in Baltra Island, Ecuador. At the gathering, government representatives highlighted the relevance of innovative financial mechanisms towards the accomplishment of their NDCs. The former Minister of Environment of Peru, Ms. Albina Ruiz, shared the experience of the Government of Peru in regards of their recent debt-for-nature conversion transaction targeting the Peruvian amazon. UNEP along with other Ecuador’s institutional partners such as UNDP, GGGI, IICA, CAF, WCS, UICN accompanied the Conference as high-level dialogue facilitators. UNEP has also been actively engaged in supporting the agenda of the Ibero-American General Secretariat (SEGIB) through its Regional Office for LAC in the context of the Forum of Ministers of Environment for LAC.  


An International Sovereign Bond (ISB) structure that addresses a sustainability goal in a particular manner.  

Ministry of Economy and Finance (2023). Second Party Opinion. 

Ministry of Economy and Finance (2023). Uruguay Sovereign debt report. 

A parallel KPI was set followed by a specific step-up/step-down coupon rate structure 

Ministry of Economy and Finance (2023). Uruguay’s SSLB. 

Uruguay’s SSLB Annual Report.  


Government of Uruguay (2022). Uruguay’s SSLB Framework. 

Government of Peru. NDC. Updated Report 2021 – 20230. 

101998 Tropical Forest and Coral Reef Conservation Act (TFCCA). Tropical Forest Conservation Act of 1998 | Archive - U.S. Agency for International Development ( 

11 US Department of the Treasury (2023). United States Signs $20 Million Debt Swap Agreement with Peru to Support Amazon Conservation.  https://hometreasury/news/pressreleases/jy1724 

121998 Tropical Forest and Coral Reef Conservation Act (TFCCA). Tropical Forest Conservation Act of 1998 | Archive - U.S. Agency for International Development ( 

13 CI (2023). Statements Environmental Organizations applaud Peru Debt-for-Nature-Swap.