Climate Insider Brief:
- The World Bank issued a $225 million bond that ties investor returns to the amount of carbon removed by reforestation efforts in the Amazon, marking a shift from traditional bonds focused on emission reduction.
- The bond will finance Brazilian startup Mombak’s reforestation projects in the Amazon, with carbon credits generated from these efforts sold to Microsoft, providing investors with potential additional returns.
- The bond was oversubscribed, reflecting growing investor interest in outcome-based financial products that support environmental sustainability, particularly in carbon removal initiatives.
In a monumental financial move, the World Bank has launched a bond aimed at saving the Amazon rainforest by directly linking investors’ returns to the amount of carbon removed from the atmosphere. This week, the World Bank issued a nine-year, $225 million note designed to fund reforestation efforts in the Amazon, marking a significant shift from traditional bonds.
What sets this bond apart is its innovative structure. Unlike previous bonds where returns were tied to avoiding emissions through curbing deforestation, this bond ties returns to the climate impact of newly planted trees. Investors are guaranteed a fixed annual coupon of 1.745%, which is lower than the rate of ordinary World Bank bonds with similar maturity. The difference, totaling $36 million in foregone interest, will be allocated to Mombak Gestora de Recursos Ltda., a Brazilian startup spearheading the reforestation efforts.
Mombak plans to use the funds to acquire or partner with landowners in the Amazon to reforest areas with native tree species. The carbon credits generated from these projects—calculated based on the amount of carbon absorbed by the new trees—will be sold to Microsoft Corp., which has committed to purchasing the credits. Bondholders will benefit from this arrangement, receiving a variable coupon linked to the number of credits sold, potentially boosting their total annualized yield to 4.362%.
Michael Bennett, head of derivatives and structured finance for the World Bank treasury, emphasized the innovative nature of the bond: “What we were trying to do here is find a way to get high-grade fixed income investors to fund these kinds of projects.” He also noted that the bonds are Triple-A rated due to total capital protection and a guaranteed minimum coupon, making them a secure investment.
This bond is part of a broader trend where investors are increasingly drawn to outcome-based financial products that support environmental and social causes. Last year, Brazil, which contains 60% of the Amazon, issued its first sustainable bond to fund environmentally and socially beneficial projects. However, investors and prominent groups have called for even more targeted bonds aimed directly at rainforest protection.
The shift toward carbon removal in voluntary carbon markets is also reflected in this bond. Projects that remove carbon from the atmosphere, such as reforestation, command higher prices for carbon credits than projects focused solely on emission reduction, which have faced scrutiny for potential greenwashing. Gabriel Silva, co-founder and CFO at Mombak, observed, “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.”
The success of this bond, which was oversubscribed, indicates strong investor demand for such innovative financial products. According to Bennett, there is interest in even larger deals, and the World Bank is already exploring additional carbon credit-producing transactions in the reforestation and agroforestry sectors, as well as other carbon sequestration technologies.
As the fight against climate change intensifies, this bond represents a promising new tool in the effort to preserve one of the planet’s most vital ecosystems—the Amazon rainforest.
SOURCE: Energy Connects
Featured Image: Credit: Mombak’s Reforestation Project
