A Nature-Based Solution with Deforestation-Linked Sovereign Bonds?

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© Oliver Paaske

Nature-based Solutions (NbS) are increasingly seen by policy-makers and financial markets as powerful concepts to address, climate change, food security and other social issues and problems

The International Union for Conservation of Nature (IUCN), a membership union composed of both government and civil society organisations, developed an international standard to best manage global challenges. The definition of NbS created by IUCN is:

“Actions to protect, sustainably manage and
restore natural or modified ecosystems that address societal challenges effectively and adaptively, simultaneously providing human well-being and biodiversity benefits.”

Captital markets contribute towards sustainability by providing innovative solutions for investors and issuers of financial instruments.

Deforestation is a significant problem for the world – accelerating climate change and threatening the natural capital base that underpins the economic strength of a number of countries.

One of the innovative concepts on the fixed income segment of the market is a Deforestation-Linked Sovereign Bond (DLSB) which can help countries with valuable state-owned forests to fund their transition to a sustainable economy. A DLSB would align the government’s fiscal and sustainability incentives, and boost the country’s sovereign health.

A Deforestation-Linked Sovereign Bond is a type of Performance Bond, a flexible financial instrument that does not restrict a government in terms of the use of proceeds, but which commits the sovereign to coupons which vary depending on its success or failure in meeting specific Sustainability Performance Targets (SPTs), in this case, deforestation.

In a webinar hosted by Z/Yen’s FS Club, a global executive knowledge network for technology and finance, Brazil will be used as a DLSB case study.

Date: Wednesday, 15 September, 2021
Time: 15-15:45 BST

Increasing deforestation remains the biggest threat to Brazil’s natural capital base, accelerating global warming, harming biodiversity, and impacting Brazil’s rainfall and temperature patterns.

As a result, Brazil’s current climate trajectory is rated ‘highly insufficient’ by ClimateActionTracker.org (on a path to 3-4oC by 2050 compared to the Paris target of 2oC).

Agenda:

  • Why Performance bonds (or Sustainability-Linked Sovereign Bonds) are a particularly useful addition to the ESG-labelled bond market
  • What lessons sovereign issuers can learn from the corporate Sustainability-Linked Bond market
  • How to measure the Sustainability Performance Target (SPT)
  • What other considerations are key including the coupon step-up or down, SPT verification and monitoring, and governance
  • What other advantages might arise from issuing a DLSB

Planet Tracker’s report on deforestation-linked sovereign bonds can be downloaded and read here

Speaker:

Peter Elwin is Director of Fixed Income, and Head of the Land Use and Textiles Programmes, at financial think tank Planet Tracker and has over 20 years of financial markets experience in senior management and functional roles on the buy side and sell side. His experience covers equity and credit research, accounting, valuation, natural capital, sustainability, strategy, and operations.

Peter was previously Head of Research at the Universities Superannuation Scheme (USS), one of the largest UK private pension schemes with over £60bn under management. Before joining USS, Peter was Deputy Head of European Research and the #1-rated Global Head of Pensions, Valuation, & Accounting research at JP Morgan.

Z/Yen FS Club Webinars

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