Could Sustainability-Linked Bonds Incentivize Lower Deforestation in Brazil’s Legal Amazon?

Setting a reachable target has been more art than science. Here at the World Bank, we developed the Feasibility-AmBitiousness (FAB) Matrix to give more structure to the target setting exercise. As the name implies, the FAB Matrix gauges targets along feasibility and ambitiousness dimensions. This helps issuers map out possible blind spots and avoid targets that are vulnerable to greenwashing accusations : i.e. highly ambitious targets may not be feasible (long shots), and, likewise, highly feasible targets may not be ambitious (low-hanging fruits).

Recent deforestation alerts suggest that forest loss in the Brazilian Amazon is slowing. This is good news – but also not entirely surprising. Economic models are becoming increasingly able to foretell the direction of deforestation. In April 2023, we published our projections for Brazil’s Land Use Change and Forestry (LUCF) emissions based on a new macroeconomic model. Back then, we only had official deforestation data until 2021. Nevertheless, the model predicted falling LUCF emissions for 2023 which is consistent with the easing deforestation pressures in the “arc of deforestation” we are now witnessing.

International investors are increasingly interested in promoting sustainable development. Deforestation in the Brazilian Amazon is among the world’s greatest environmental challenges, despite declines from a 2004 peak in Brazil’s Legal Amazon, which includes nine states covering the Brazilian share of the Amazon and parts of two other biomes. Recently, deforestation appears to be accelerating again. Could more decisive government action have averted this recent increase? If so, can financial instruments help incentivize governments to protect critical natural assets like the Amazon going forward? It’s possible.

In an upcoming publication “An Economic Memorandum for the Brazilian Amazon” we introduce the concept of a model-based KPI. The key idea here is that outcome and performance are not the same. Performance is the difference between an observed outcome and would have been expected, based on a forward-looking statistical model.