Investing in forests is investing in people, economies, and the health of our planet. The World Bank estimates that the Amazon rainforest regions of Brazil, for example, provide USD 317 billion of economic value annually for the communities that live there. Of course, the Amazon also benefits the world as a whole. Representing more than half of the planet’s remaining tropical forest, the Amazon rainforest serves as one of the world’s largest carbon sinks, with the Brazilian regions alone providing a theoretical annual value of USD 210 billion to the planet.[1] And while deforestation in the Brazilian Amazon has slowed in recent years, there remains an urgent need to restore the native landscapes. Reforestation creates tremendous value by sequestering carbon in its trees and soil while enhancing biodiversity and fostering socioeconomic development in local communities.
Innovative financial instruments that blend capital markets and carbon markets can be used to support large-scale sustainable forest management programs by providing resources to local communities that reinforce on-the-ground decisions that place value on local ecosystems. One growing area of the carbon markets are so-called ‘carbon removals.’ Removals occur when one ton of carbon is taken out of the atmosphere – such as through reforestation and afforestation. The environmental benefits of carbon removals can often be easier to substantiate by tracking degraded land that is reforested, as compared to avoided deforestation credits that are based on protecting land from the potential of future deforestation. This is one reason Carbon Removal Units (“CRU”) are a growing asset in global carbon markets as private entities seek these out for the purposes of complying with voluntary climate change mitigation commitments.
The World Bank Amazon Reforestation-Linked Outcome Bond is an example of using the growing interest in the purchase of CRUs to support reforestation in the region. The USD 225 million 9-year principal protected bond was issued by the International Bank for Reconstruction and Development (“IBRD” or the “World Bank”) with a unique feature, whereby the return for the bond’s investors is linked to the issuance and monetization of CRUs.
“This new outcome bond is a remarkable win-win, creating a bridge between capital markets investors seeking to support positive development and environmental impact in the Amazon with reforestation projects that will help safeguard one of our most valuable natural resources with rich biodiversity, climate and social benefits,” said Jorge Familiar, Vice President and Treasurer, World Bank.
Similar to other recent outcome bonds issued by the World Bank, investors receive a guaranteed return that is lower than the ordinary return paid to investors for regular World Bank issuances of similar maturity. In this instance an amount equal to the foregone coupon payments (the differential between the World Bank ordinary return and the fixed return) are used to support reforestation projects. Approximately USD 36 million of capital is mobilized through the bond and channeled to the projects through HSBC to Mombak (project developer) subject to the achievement of certain milestones. Mombak, a company based in Brazil, specializing in large-scale reforestation projects in the Amazon rebuilds forests of the Amazon by developing high-integrity carbon removal projects, reforesting degraded Brazilian pastureland using native and biodiverse tree species.
“We are happy to partner with the World Bank and HSBC in the largest outcome bond deal to date. This first debt transaction for biodiverse reforestation will help unlock debt capital markets for the industry,” said Gabriel Silva, co-founder and CFO of Mombak.
In return, in addition to receiving a smaller guaranteed return, investors receive amounts from the World Bank linked to the value of the CRUs – if any – generated and sold by these reforestation projects. In a separate agreement, Microsoft agrees to purchase these CRUs from Mombak. The bond will therefore offer investors a potential enhancement over the yield of regular World Bank issuances of similar maturity if the projects perform as expected.
“Microsoft’s journey to become carbon negative by 2030 involves pioneering projects with partners like Mombak and their Amazon Reforestation Fund. Our carbon removal work with partners such as Mombak is paving the way for new investors in conservation. The World Bank Amazon Reforestation-Linked Outcome Bond demonstrates that corporate offtake agreements for carbon removal are crucial for innovative financing mechanisms for nature-based carbon removal projects. Unlocking low-cost, institutional debt financing is essential for the growth of the Voluntary Carbon Market (VCM). The World Bank’s innovative approach to conservation finance in the Amazon supports forest protection and sustainable livelihoods, and offers new tools for private investment in environmental initiatives,” said Brian Marrs, Senior Director for Energy & Carbon Removal at Microsoft.
Courtesy World Bank
