As the leader of the team that created the first sovereign sustainability-linked bond (SSLB) with a two-way coupon, Uruguay's head of the sovereign debt management office, Herman Kamil, paved way for other sovereigns to incorporate the structure.

Kamil's vision was to create a sustainable sovereign debt instrument that would compensate investors if Uruguay failed to meet its environmental commitments under the Paris Agreement – via a coupon step-up – while rewarding Uruguay if it overperformed on its environmental targets, via a coupon step-down.

When his pioneering team started working on it in March 2020, no sovereign had yet issued an SLB. And there were only a few corporate SLB examples to refer to. A two-way coupon did not yet exist for SLBs either.

The logistical challenge of coordinating such a breakthrough idea for a sovereign was significant, Kamil told Environmental Finance. Kamil and his team at the Ministry of Finance worked with other four different ministries within the Uruguayan government to shape the policies and create the inter-ministerial governance structures necessary to design the SLB and "facilitate continuity of the policies and commitments past the current administration".

Kamil and his team also worked closely with the Inter-American Development Bank (IDB), the four banks that acted as bookrunners on the deal, and their legal teams, receiving "support, technical expertise, and advice on how to engage with the investor base".

Kamil says his team engaged with investors early in the process to test if the idea would be well received. While he noted some initial resistance to the idea of a step-down, Kamil says the key message to impress was the potential for an overall decrease in the total cost of capital for the country if its sustainability targets were achieved.

"We needed to convince investors that if a country overperforms on one or more of its KPIs – and this triggers a step-down – then this would still be of benefit to the investor, as it is likely the country would improve its credit profile overall.

"We argued that incentives were well aligned. That really resonated with investors. In the end, the focus became less about the coupon step-down and more about how such an instrument could incentivise a country to overperform on its targets, enhance its ESG foundations and how that would positively impact its credit quality and the secondary market prices of the bond.

"We were very satisfied with the reaction of the market. The SSLB was almost three times oversubscribed. This suggests that many investors had accepted the theoretical notion that a country's environmental performance could lead to a lower credit risk. It was a proof-of-concept", he says.

The cross-ministry collaboration within the Uruguayan government has also helped promote sustainability within the country, he says.

"It's been a very enriching process across the whole public sector ... and that's something that will have an effect for years to come."

One Bond Awards judge commented: "Herman made an outstanding contribution to the development of sustainable debt markets and climate finance more generally in his home country. The introduction of innovative features in their bond financing strategy not only constructively moves the market forward but also leaves a lasting impact on Uruguay's climate pathway."

Another said: "The Uruguay SLB was at the forefront of innovation when it comes to SLBs and was built off of a strong NDC [Nationally Determined Contribution]. It was great work that will provide the blueprint for other sovereigns."

The issue includes two key performance indicators (KPIs) tied to the reduction of greenhouse gas (GHG) emissions and the percentage area of native forest coverage in the country. Uruguay has committed to an external review conducted by the United Nations Development Program (UNDP) on both KPIs throughout the duration of the SLB.

Kamil adds: "While I am pleased to receive this award, this is first and foremost, a team undertaking. It reflects a lot of effort from a lot of people, for a long time and across the whole public sector. In particular, without the unstinting support from my colleagues at the debt management office and the Ministry of Finance, this endeavour wouldn't have been possible."