Increasing number of private investors support outcome bonds which link financial return to measurable and impactful development outcomes
The World Bank (International Bank for Reconstruction and Development, IBRD) priced a 9-year USD 225 million, principal-protected Amazon Reforestation-Linked Bond. The largest World Bank outcome bond ever priced provides investors with a coupon that includes a fixed guaranteed component and a variable component linked to the generation of Carbon Removal Units (CRUs) from reforestation projects in the Amazon rainforest regions of Brazil. It is the first bond linking investors’ financial return to the removal of carbon from the atmosphere, differing from past transactions linked to the sale of carbon credits from avoided emissions.
Through the transaction, approximately USD 36 million of capital is mobilized to support the reforestation activities of Mombak, a Brazilian based company. The company uses these funds to acquire or enter into partnerships with landowners in the Amazon rainforest to reforest the land with native tree species. In addition to removing carbon, the reforestation enhances biodiversity and fosters socioeconomic development in local communities. The innovative use of CRUs in this outcome bond structure introduces a new model for mobilizing private capital to support reforestation finance.
“A variety of partners and financing tools are needed to support the Amazon and help the people there pursue better livelihoods, protect its incredible biodiversity, and safeguard its global role in mitigating climate change,” said Jorge Familiar, Vice President and Treasurer, World Bank. “As demonstrated by the historic level of participation in today’s transaction, private investors are eager to connect their financial return to positive development outcomes in the Amazon region. With this largest ever outcome bond we continue to be encouraged by the growing interest in the structure as well as the expanded list of sectors supported.”
The bond is 100% principal protected with the USD 225 million proceeds used to support the World Bank’s sustainable development activities globally. Investors in the bond will forego a portion of the ordinary coupon payments, with the equivalent amounts instead being provided, through a hedge transaction with HSBC, to support the financing of the Mombak projects. The Mombak reforestation projects align to the World Bank’s priorities in the Amazon and are not financed by IBRD lending. The generated CRUs will be purchased through an offtake agreement by a CRU off-taker. A portion of the revenue generated from this sale will be paid to bondholders in the form of CRU Linked Interest, in addition to the minimum guaranteed coupon the World Bank will pay investors. The bond offers investors a potential financial benefit compared to regular World Bank bonds of similar maturity if the projects and monetization of high-quality CRUs are generated as expected.
“We are pleased to work alongside the World Bank on this innovative bond which aims to support the reforestation of thousands of hectares of the Brazilian Amazon rainforest. We are committed to helping our clients fund sustainable development projects that make a difference in the climate challenge. It was a privilege for HSBC to structure the transaction and act as sole lead manager on the World Bank’s largest-ever outcome bond issuance to-date,” said Greg Guyett, CEO of Global Banking & Markets, HSBC.
“We are excited to be the largest investor in the World Bank’s innovative transaction that provides attractive relative valuation through the deployment of capital to reforestation projects within the Amazonian rainforest in a template-like structure. The removal of carbon from the atmosphere through the generation of Carbon Removal Units that will be subject to ongoing verification by an independent third party, enhanced biodiversity and socioeconomic development in local communities align with our focus on investing in securities that have a direct and measurable social and/or environmental impact,” said Stephen M. Liberatore, CFA, Senior Managing Director/Head of ESG/Impact – Global Fixed Income, Nuveen.
“T Rowe Price is very proud to be a lead investor in the World Bank’s pioneering Amazon Reforestation-Linked Outcome Bond. This innovative, outcomes-based transaction offers a unique combination of attractive financial return potential alongside material and measurable positive impact. We believe this bond will help deliver additionality through removing carbon, improving biodiversity, and supporting job creation,” said Matt Lawton, CFA, Global Impact Credit Portfolio Manager, T Rowe Price.
“Mackenzie Investments is proud to partner with the World Bank by investing in the USD 225 million Amazon Reforestation-Linked Outcome Bond. This transaction, in partnership with Mombak, offers a landmark opportunity in nature positive investment while supporting land stewardship principles. We believe the bond’s unique structure will prove to be both a strong investment and a catalyst for further innovation in the sustainable fixed income market,” said Hadiza Djataou, Vice President, Portfolio Manager, Fixed Income, Mackenzie Investments.
“We are delighted to be an initial investor in the World Bank Amazon Reforestation-Linked Outcome Bond and support an innovative transaction, that will provide funding to reforestation efforts in the Brazilian Amazon – a globally crucial region. We believe this particular bond offers both the exciting prospect of measurable environmental impact, and potentially attractive financial returns for our Ethical and Global Sustainability bond funds,” said Stuart Chilvers, co-fund manager of the Rathbone Greenbank Global Sustainability Bond Fund and portfolio manager for Rathbone Ethical Bond Fund.
“Velliv is very pleased to participate in the Amazon Reforestation-Linked Bond. This impact investment goes very well hand in hand with both the carbon-reduction, social and biodiversity priorities of Velliv. Velliv is pleased the transaction has identified Mombak to carry out the groundwork and succeed with this important objective,” said Thor Schultz Christensen, Deputy Chief Investment Officer, Velliv Pension.
Source: World Bank
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