As the role of capital markets in helping fund the fight against climate change has grown in recent years, mobilizing fresh sources of capital to meet sustainability targets has increasingly called for creativity. A case in point is the World Bank, which has developed securities that link financial outcomes with sustainable goals.
Last August, the mulilateral development bank placed a $225 million, 9-year bond that yield 4.362% — but can pay more if certain targets are met.
The bond in question, which wins Financial Innovation of the Year, constitutes the first ever carbon removal credit-backed financing in the international debt capital markets. It may provide a framework for the involvement of global investors in decarbonization efforts by large corporations in emerging markets.
Of the money raised by the bond, $36 million was earmarked for Mombak, a firm that develops carbon capture projects in Brazil. The money will be released in 11 tranches to Mombak and has already started to be disbursed. The company will use the proceeds to promote reforestation projects, producing carbon credits that will be purchase by Microsoft.
Michael Bennett, manager of Market Solutions and Structured Finance at the World Bank, notes that the deal is part of a series of Outcome Bonds designed by the institution with the goal of finding money for sustainable initiatives that would otherwise struggle to get financing.
It was the first such bond issued in Latin America, the largest of the series, and the one with the longest tenor. It also stands out for raising money for the operations of a for-profit private company.
Bennett explains that the structure is basically a bond where the proceeds stay with the World Bank, which pays a minimum coupon to investors. On top of the fixed coupon, investors can earn part of the benefits generated by the Mombak project.
“A number of banks and project operators are really interested in this structure,” Bennett says, noting that this particular transaction was brought to the multilateral by HSBC.
The land to be purchased by Mombak is to be found in degraded areas of the Amazon forest that were previously employed for cattle grazing and other such uses.
“Mombak takes over that land, either as owner or in partnership with an existing landowner, and reforests, basically creating a forest, including many different native species of trees,” he explains. “The expectation is that, once the forest reaches a certain level of of growth, carbon credits will start to be produced.”
As the development of a reforestation project takes some time, for the first four years investors will receive a fixed coupon of about 1.75%. The credit coupon-linked coupon kicks in after that.
Bennett says that investors felt comfortable with the structure – an important factor for the future of sustainable finance.
“We are not asking for charity. We are trying to create something that has the right risk-return relationship for institutional investors,” he says. “It was a negotiation with investors to find out how much return they needed. There are different ways to generate that return, including from donors, but investors will definitely expect an appropriate return for the risk they take on.”
Lead Manager: HSBC
Legal Counsel: Clifford Chance; Pinheiro Neto
Investors: Nuveen; T Rowe Price; Mackenzie Investments; Rathbone; Velliv; AP2; Azimut; IMPAX; Muzinich; RBC BlueBay Asset Management
CRU Offtaker: Microsoft
Reforestation projects: Mombak
All supporting financial institutions and law firms were transmitted to LatinFinance by the award category winners. For updates please email awards@latinfinance.com