Most importantly, the FRELs do not provide a clear justification for additionality. From Brazil’s submissions under the UNFCCC13 we can gather a potential justification, since the submissions explicitly state that the FRELs “[do] not include assumptions on potential future changes to domestic policies.” This is different for the benchmarked KPIs, which satisfies the informativeness principle. The benefit of the latter is that it disentangles which part of deforestation was under the issuer’s control and which part was not, which in turn satisfies the controllability principle.

An alternative approach that satisfies the relative performance evaluation is the work of GuizarCoutiño et al. (2022) and West et al. (2020) who used statistical methods based on matching to estimate the additionality of conservation projects on a sub-national project level. While GuizarCoutiño et al. (2022) find that deforestation in 40 conservation projects areas in nine countries was reduced by 47%, on average, compared to matched control pixels, West et al. (2020) find little evidence that such projects in the Brazilian Amazon “have mitigated forest loss” compared to matched control regions using synthetic control methods. This method was also explored by de Smit (2022) on a country level, though the author did not find any statistically significant results.

# **5 Setting ambitious, yet feasible targets**

A promising SPT strikes a good balance between ambitiousness and feasibility.14 So far, we have described how the framework assesses performance and sets incentives through benchmarked KPIs. In this section, we discuss another essential aspect of the framework: setting ambitious SPTs that remain feasible to achieve. The ICMA guidelines define ambitious targets as those that “represent a material improvement [...] beyond a ‘Business as Usual’ trajectory” (ICMA, 2020). At the same time, the guidelines emphasize the need for feasible targets based on “benchmarking approaches” such as the past performance of the issuer, their peers, or science-based scenarios.

The Feasibility-Ambitiousness (FAB) matrix summarizes how we assess sustainability performance targets. Figure 8 shows the interplay between feasibility and ambitiousness. The ideal targets are those that are highly ambitious and become increasingly feasible due to SLB funding. Such targets imply additionality and thereby send the strongest signals for both issuers and investors.

## **5.1 Low-hanging fruits and long shots**

**Low-hanging fruits** Issuers of SLBs with unambitious targets are vulnerable to greenwashing allegations. If little to no effort is necessary to reach the SPT, then such targets would have likely been realized without the SLB financing. This is especially true for SPTs that the issuer was already making good progress towards. Additionally, in the event of reaching an SPT, investors will face lower financial returns due to the triggered step-down. Responsible or impact investors may find such an SLB unattractive since they would have to justify the financial and reputational consequences if the social or environmental impact achieved was only a low-hanging fruit.

**Long shots** If achieving the SPT would require an unrealistic improvement, projects may be regarded as unattainable and overzealous. Issuers would likely have to pay a penalty fee since the SLB structure stipulates a step-up in the case of missing the SPT. Such overambitious SPTs may be therefore only look good on paper and never translate into reality, leading to possible greenwashing allegations. Investors that buy such an SLB face two types of reputational risks.

> 13See Ministry of the Environment of Brazil (2018) and Ministry of the Environment of Brazil et al. (2014).

> 14Visit https://esgdata.worldbank.org/tools/fab to analyze indicators and countries on the Sovereign ESG Data Portal.

18