As deforestation progresses at a torrid pace, countries in the Amazon region are increasingly vulnerable to climate change and its potential negative economic impacts.
A new policy brief from Moritz Kraemer argues that tailored financial instruments can support incentives for conservation for both current and future governments in the Amazon region. Linking deforestation to debt service costs could create a clear financial incentive to policymakers to enforce national rules aimed at preventing deforestation.
Kraemer suggests that sovereign governments in the Amazon basin region could issue standardized sustainability-linked bonds (SLBs), wherein interest varies inversely with the progress made by the respective governments in reducing deforestation, thereby making conservation financially attractive for governments. It is important to note, however, that SLBs are not an instrument to restructure debt and will not signal financial distress. Rather, government debt service costs will be linked to independently measured progress in reducing national deforestation rates, thereby enhancing the monetary value of the forest. Standardized issuance by different Amazon governments will enhance liquidity and reduce debt service costs further. Importantly, SLBs are specialized sovereign issuance and can be implemented independently of sovereign debt restructuring efforts. If SLBs were linked to debt swaps including debt relief, the related stigma would reduce the chances of broader adaptation by issuers and limit the attractiveness for investors.
If purposefully designed, SLBs will provide financial incentives to overcome the perceived short-term trade-off between conservation and development.