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Uruguay progress on greenhouse-gas emission intensity reduction target slips in 2021

Strategic Considerations: Uruguay came to market in October 2022 with USD 1.5bn 5.75% sustainability-linked notes due 2034. The bond is tied to performance targets including a reduction of at least 50% in greenhouse-gas (GHG) emission intensity by 2025 from 1990 levels and preservation of the country’s native forest area compared to 2012. While the country appears to be on track to reach the forest-cover target, its first sustainability-linked bond (SLB) report shows that progress toward reducing GHG emissions per real GDP unit slipped in 2021 compared to reductions achieved in 2019. 

  • The country in 2021 reported a 41% reduction in emission intensity compared to the reference year, down from a 48% reduction by 2019 
  • Methane emissions accounted for 57.1% of total national emissions 
  • The country faces a 15bps coupon step-up in 2027 per each target it falls short of  

The Oriental Republic of Uruguay saw its greenhouse gas (GHG) emission intensity rise from 2019 to 2021, according to a sovereign sustainability-linked bond (SLB) annual report published last week. 

Uruguay sold its debut SLB in October 2022, as reported. The USD 1.5bn 5.75% notes due 2034 are tied to key performance targets with respect to the country’s aggregate gross GHG emissions per real GDP unit and the preservation of its native forest area. 

The country must achieve a reduction of at least 50% in GHG emission intensity by 2025 from 1990 levels and maintain its native forest area compared to 2012, as also reported.  

Uruguay posted a 41% reduction in GHG emission intensity in 2021 against the 1990 baseline, meaning the indicator was down from a 48% reduction by 2019. The figure was also nine percentage points short of the target set for 2025.  

The jump in its GHG emission intensity was driven by a 10.7% increase in aggregate gross GHG emissions during the period and a cumulative contraction of 1.3% in real GDP over the same period following the COVID-19 pandemic, per the annual report.  

GHG emissions were up mainly due to higher exports of electricity sourced from fossil fuels in light of the drought in Argentina and Brazil. Another factor was domestic expansion of cultivated crop areas which led to a higher use of nitrogen fertilizers.  

Still, the South American nation is “committed to continuing its transition toward a low-carbon, environmentally sustainable economy.” It is promoting electric mobility and production of green hydrogen with a view to bringing down carbon dioxide emissions in sectors such as heavy transportation.

Uruguay also expects to increase agricultural and livestock production while cutting methane and nitrous oxide emissions, the report noted. Methane emissions accounted for 57.1% of aggregate national emissions in 2021, followed by nitrous oxide at 21.5% and carbon dioxide at 21.4%.  

The agricultural and livestock sector accounted for 92.3% and 96.8% of methane and nitrous oxide emissions, respectively. Within that sector, the cattle-raising industry made up 85% and 61% of methane and nitrous oxide emissions, respectively. 

In terms of the bond’s second key performance indicator, Uruguay obtained 100% maintenance of native forest area with respect to the baseline. The country "is poised to reach the target” by 2025, though achieving the goal will “require significant efforts.” Uruguay's native forests are exposed to degradation and deforestation driven by illegal logging for firewood, invasive species, and changes in water regimes, the report noted. Native forests account for approximately 4.8% of total land area. 

The country faces a 15bps coupon step-up in 2027 per each target it falls short of, as reported. The bond was the first sovereign deal to include a two-way pricing mechanism, so Uruguay could also see a 15bps coupon step-down if performance exceeds the targets. 

Uruguay will publish a yearly sovereign SLB report on or before 31 May until the maturity of the notes. 

by Carla Dager, Guayaquil 

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