A World Bank reforestation bond aimed at protecting the Amazon is the largest outcome bond the bank has ever priced.
The World Bank has issued a $225m (€202m), principal-protected nine-year bond linked to reforestation in the Amazon.
The 2033 bond offers investors a return linked to the creation of carbon removal units (CRU) from reforestation initiatives in Brazil’s Amazon rainforest, and is the largest outcome bond the bank has ever priced. It is also the first bond to link investors’ financial returns to carbon removal, differing from previous deals which were tied to the sale of carbon credits from avoided emissions, according to the World Bank.
Investors in the new bond include Nuveen, T. Rowe Price, Mackenzie Investments, Rathbones Group, and Danish firm Velliv Pension.
Through the transaction, roughly $36m of capital is being mobilised to support the reforestation activities of Mombak, a Brazilian based company working with local landowners to replant native tree species in the Amazon. Investors will initially forgo a portion of the ordinary coupon payments, with the equivalent amounts being provided via a hedge transaction with HSBC.
The Mombak reforestation projects align to the World Bank’s priorities in the Amazon and are not financed by the lending, it says. The bank also says that the use of CRUs in this outcome bond structure introduces a new model for mobilising private capital to support reforestation finance.
Jorge Familiar, vice president and treasurer of the World Bank described the level of participation of the bond as “historic”, adding that the bank is encouraged by the growing interest in the deal’s structure.
“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,” he said.
Private capital supporting reforestation
HSBC acted as lead manager on the deal. The CRUs generated from the project will be purchased through an off-take agreement by a CRU off-taker, with a portion of the revenue generated to be paid to bondholders in the form of CRU-linked interest.
The International Bank for Reconstruction and Development (IBRD), known as the World Bank in capital markets, was founded in 1944 to rebuild Europe after the Second World War. It operates as a global development cooperative owned by 189 nations, of which the six largest shareholders are the US, Japan, China, Germany, France and the UK. Its loans are aimed at supporting the UN Sustainable Development Goals, and to end extreme poverty and promote shared prosperity.
Thor Schultz Christensen, deputy chief investment officer at Velliv Pension said: “Velliv is very pleased to participate in the Amazon Reforestation-Linked Bond. This impact investment goes hand in hand with both the carbon-reduction, social and biodiversity priorities of Velliv. We are pleased the transaction has identified Mombak to carry out the groundwork and succeed with this important objective.”
Earlier this year, the bank issued a sustainable development bond aimed at ending extreme poverty which raised $5bn from a record 175 investors, as reported by Impact Investor.
