The World Bank said the bond was oversubscribed compared to expectations, indicating similar large-scale transactions are possible. Photo: Pexels
4 min read Last Updated: August 15, 2024 | 09:02 PM IST
Tiffany Tsoi and Greg Ritchie
A new kind of bond aims to save the Amazon rainforest by tying investors' financial returns to the amount of carbon removed from the atmosphere.
The World Bank issued a nine-year, $225 million bond this week to help finance Amazon reforestation. Unlike previous bonds, buyers' returns will be tied to the climate impact of new trees, rather than the emissions avoided from curbing deforestation.
Investors will receive a fixed guaranteed coupon of about 1.745% per year, lower than regular World Bank bonds of similar maturities. The $36 million in waived coupon will be used to fund reforestation efforts by Mombak Gestora de Recursos Ltda., a Brazilian start-up. HSBC Holdings Plc acted as an adviser to the deal.
Monvac will use these funds to partner with Amazon landowners to reforest land with native trees, according to the World Bank. The project will generate carbon credits, calculated based on the amount of carbon removed by the trees, that can be sold to Microsoft, which has a purchasing agreement with Monvac.
Bondholders will receive a share of the proceeds from the sale through an additional floating coupon tied to the number of bonds sold. Holders can expect to earn up to 4.362% annually, the supranational agency said.
“What we've been trying to do here is find a way to bring together quality bond investors to fund these types of projects,” said Michael Bennett, head of derivatives and structured finance at the World Bank's Treasury department.
Bennett said the bonds have full principal protection, are triple-A rated and have guaranteed minimum coupons.
The deal is the latest in the World Bank's unusual series of results-based bonds and its largest to date, raising $150 million in 2022 to be used in part to protect black rhinos.
This week's bond sale taps into investor demand for products aimed at protecting the Amazon. Brazil, which owns 60 percent of the Amazon forest, sold its first sustainable bond last year, with proceeds earmarked for environmentally and socially beneficial projects. A group of prominent investors is urging Brazil to go a step further and issue bonds tied to protecting the rainforest.
ESG Shift
By financing carbon removal, the bond takes advantage of a shift in voluntary carbon markets where buyers are willing to pay more for projects that actually remove carbon. Credits generated by carbon removal — and thus by reforestation — are more expensive. But the alternative, credits tied to halting deforestation, has come under increasing scrutiny for its role in greenwashing.
“As the market matures and buyers do their due diligence, they're becoming more and more concerned about quality because they realize that the carbon they buy may not be what they expected,” said Gabriel Silva, co-founder and CFO of Momvac. “Some companies, like Microsoft, are actually moving away from emissions reduction credits and focusing only on carbon removal, and that's a trend I'm seeing more and more.”
The World Bank said the bond was oversubscribed compared to expectations, indicating similar larger transactions are possible.
“Some investors are looking for even larger sizes because there are formal or informal minimum sizes,” Bennett said. “We are looking at other carbon credit generating transactions in reforestation, agroforestry areas and other carbon sequestration techniques.”
Investors included T. Rowe Price Group, Nuveen Asset Management and Rathbones Investment Management, according to the statement.
First Published: 15 August 2024 | 9:02 PM IST
