WB issues world's 1st carbon removal bond to fund Amazon reforestation

By Tiffany Tsoi and Greg Ritchie

A new kind of bond is trying to save the Amazon rainforest by linking investors’ financial returns to the amount of carbon removed from the atmosphere.
 

The World Bank sold a nine-year, $225 million note this week which will help raise funds for reforestation in the Amazon. Unlike prior bonds, buyers’ returns will be linked to the climate impact of the new trees, rather than to the avoidance of emissions through curbing deforestation.

Investors will earn a fixed guaranteed coupon, of approximately 1.745 per cent annually, lower than ordinary World Bank bonds of similar maturity. The foregone coupons worth $36 million will be used to fund Brazilian startup Mombak Gestora de Recursos Ltda.’s reforestation activities. HSBC Holdings Plc advised on the deal.

According to the World Bank, Mombak will use these funds to acquire or enter into partnerships with landowners in the Amazon to reforest the land with native tree species. The carbon credits produced by the projects, calculated based on how much carbon is removed by the planted trees, will then be sold to Microsoft Corp., which has entered a purchase agreement with Mombak. 

Bondholders will receive a portion of the revenue generated from that sale through an additional variable coupon linked to the number of credits sold. They can expect to earn up to a total annualized yield of 4.362 per cent, the supranational institution said.

“What we were trying to do here is find a way to get high grade fixed income investors to fund these kinds of projects,” said Michael Bennett, head of derivatives and structured finance for the World Bank treasury. 

The bonds have total capital protection, and so are Triple A rated as to their principal, as well as a guaranteed minimum coupon, according to Bennett. 

The deal is the latest in a series of unusual outcome-based bonds from the World Bank and is its largest to date. In 2022, it raised $150 million to be partially used for the conservation of black rhinos. 

This week’s sale latches onto investor demand for products to protect the Amazon. Brazil, which is home to 60 per cent of the Amazon forest, sold its first-ever sustainable bond last year with proceeds targeted at environmentally and socially beneficial projects. Prominent investor groups have called on the nation to go a step further and issue a bond linked to protecting the rainforest. 

ESG Shift 
 

By funding carbon removal, the bond is tapping into a shift in voluntary carbon markets where buyers are willing to pay more for projects that actually remove carbon. Credits generated by carbon removal, the kind produced by reforestation, are more expensive. But the alternative — credits linked to stopping deforestation — have been coming under increasing scrutiny for their role in greenwashing.

“As the market matures, and buyers do their due diligence, they are becoming more and more concerned with quality, because they’re realizing that sometimes the carbon that you buy ends up being not what you expected,” said Gabriel Silva, co-founder and CFO at Mombak. “Some companies, like Microsoft, have actually gone away from emission reduction credits and they just focus on carbon removal. And that’s a trend I’m seeing more and more.”

The World Bank said that the bond was oversubscribed, showing that bigger deals of a similar kind are possible.

“There are investors that want to see even larger sizes, as they have formal or informal minimum sizes,” Bennett said. “We’re looking at other carbon credit producing transactions in the reforestation, agroforestry space and at other carbon sequestration technologies.”

Investors included T Rowe Price Group Inc., Nuveen Asset Management and Rathbones Investment Management Ltd., according to the statement.