CASE STUDY

Uruguay Pioneers World Bank's First Loan with
Built-in Climate Incentives
Uruguay
secureda$350
milliondevelopment policy loan from the WorldBank with an innovative, built-in interest
reductionmechanism.
Under
thispioneering loan, interest payments will be
reduced if Uruguay meets its ambitious
targets for lowering the methane emissions
intensity of beef production.
This is the first-ever performance-linked loan by theWorld Bank that provides direct financial incentives toa country to meet ambitious climate andenvironmental targets well beyond the project closingdate.
The precedent-setting operation is aligned with thecommitments in the World Bank’s Evolution Roadmap
to incentivize countries to further deliver global public
goods. The lessons learned on livestock methane
reduction in Uruguay generated through this loan
could have a significant impact on reducing theintensity of livestock methane emissions globally.

Background

Uruguay has long been a passionate supporter ofclimate action. The country established ambitious
greenhouse gas emission cuts in its Nationally
Determined Contributions (NDCs) in 2017 and raised
these targets even further in 2022.
As Uruguay is among the top six exporters of beef
globally, reducing methane emissions from cattle isinstrumental in achieving Uruguay’s climate targets.
Although between 1990 and 2018, the country
decreased the methane emissions intensity of beef
production by 28 percent, methane from livestock still
represents about 49 percent of Uruguay’s
greenhouse gas emissions.
Uruguay wanted to align its financing strategy to its
climate strategy to demonstrate its determinationand motivation for balancing economic growth withclimate action.
Hence, when Uruguay and the World Bank developed
the Green and Resilient Growth Development Policy
Loan (DPL), the Government sought to link thePhoto Credit: Adobe Stockfinancial terms of this new IBRD loan to lowering
methane emissions intensity.

Project and Financial Objectives••

Promote stronger, more resilient growth andgreening of Uruguay’s economy
Incentivize climate mitigation efforts by linking
loan pricing to the country’s climate targets

Financial Solution and Outcomes

To provide direct financial incentives for a country tomeet ambitious climate goals, the World Bank
designed a financial product that directly links loan
pricing to reductions in methane emissions intensity.
Under the loan terms, Uruguay has committed toreduce methane emissions per unit of beef by at least
33 percent between 2025-2029, and by at least 36
percent between 2030-2034, making it a sequentiallyambitious mechanism. These targets are 1 percent
more ambitious than Uruguay's NDC targets for the
reduction of methane emissions intensity of beefproduction.
If Uruguay meets the first target, it will receive a 50basis point interest rate reduction on the loan.
Meeting the second target will lead to a 100-basis
point interest rate reduction. If Uruguay does notmeet the targets, the loan interest rate will remain atstandard IBRD terms as there is no step up in theinterest rate for missing targets.
If both targets are achieved during the 10-year
performance period, Uruguay could see a reductionof up to $12.5 million in interest payments over theCASE STUDY
life of the loan. This interest rate reduction is paid outof the Global Public Goods Fund administered by theWorld Bank. The Fund provides concessional
financing to support innovative IBRD operations thatgenerate global or regional environmental benefits,
including greenhouse gas mitigation measures.
The United Nations Development Programme (UNDP)
will verify progress towards the targets.

Figure 1 Pricing of the loan interest contingent upon Uruguay meetingtargets They will secure discounts if they hit methane reduction targets

Environmental Finance recognized this innovation as
the “Sustainability-linked Loan of the Year – SSAs/SubSovereigns” in its Sustainable Debt Awards 2024.

World Bank’s Role•••This pilot operation required the collaboration ofmany global and regional units and practices
within the Bank and was co-led by the regional
Macro, Trade and Investment (MTI) andEnvironment (ENB) teams, in collaboration with
the Country Management Unit, Legal, and the
project implementation team to:Conceptualize and design the new product,
including the mechanism for accounting andbilling;
Provide numerous financial scenarios to help
the client understand the financial features of thenew product;••

Optimize parameters such as distribution ofinterest rate step-down amounts and availabilityof conversion features;
Provide guidance to the client and World Bank
project team throughout the loan negotiation
process to ensure timely project delivery andBoard approval.

The aim of this pilot program is to replicate it for otherclimate and nature-focused operations in IBRD
countries that invest in global public goods through a
direct financial incentive embedded in the loan. The
source of the interest buydowns could be from theGlobal Public Goods Fund, the proposed Livable
Planet Fund, other donor funds, or even possibly
from the monetization of emission reduction credits
through funds such as the World Bank-administered
SCALE (Scaling Climate Action by Lowering Emissions)fund, or from carbon markets. The critical aspect of
this loan for Uruguay is that it sets a precedent andcreates the loan infrastructure (e.g., documents,processes, systems, etc.) for future operations toencourage a rapid ramp-up in investments in global
public goods.
Summary of Financial
Approval Date

November 16, 2023

Amount$ 350 millionTerm

15.5 years

Grace period

4 years

Structure

Amortizing

Pricing

IBRD Variable Spread + SOFR

Pricing discount

Up to 50 basis points from 2028-2033
Up to 100 basis points from 2033-2037(Contingent upon meeting targets)

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.