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 provide USD 317 billion of economic value annually for the communities that live there. The Amazon also benefits the world as a whole, representing more than half of the planet’s remaining tropical forest and serving as one of the world’s largest carbon sinks. The Brazilian regions alone provide a theoretical annual value of USD 210 billion to the planet. While deforestation in the Brazilian Amazon has slowed in recent years, there remains an urgent need to restore native landscapes. Reforestation creates significant 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 support large-scale sustainable forest management programs by providing resources to local communities that reinforce on-the-ground decisions valuing local ecosystems. One growing area of the carbon markets is ‘carbon removals.’ Removals occur when one ton of carbon is taken out of the atmosphere through reforestation and afforestation. The environmental benefits of carbon removals can often be easier to substantiate by tracking degraded land that is reforested compared to avoided deforestation credits based on protecting land from potential 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 complying with voluntary climate change mitigation commitments.
The World Bank Amazon Reforestation-Linked Outcome Bond exemplifies using growing interest in purchasing 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 World Bank) with a unique feature where returns for investors are linked to issuing and monetizing 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 at World Bank.
Similar to other recent outcome bonds issued by the World Bank, investors receive a guaranteed return lower than ordinary returns paid for regular World Bank issuances of similar maturity. In this instance, an amount equal to foregone coupon payments (the differential between ordinary returns and fixed returns) supports reforestation projects. Approximately USD 36 million of capital mobilized through the bond channels to projects via HSBC to Mombak (project developer), subject to achieving certain milestones. Mombak specializes in large-scale reforestation projects in Brazil's Amazon, rebuilding forests using native 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 at Mombak.
In return, besides receiving a smaller guaranteed return, investors receive amounts from World Bank linked to CRUs' value generated and sold by these reforestation projects. In a separate agreement, Microsoft agrees to purchase these CRUs from Mombak. Thus, offering investors potential enhancement over yields from regular World Bank issuances if 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," said Brian Marrs, Senior Director for Energy & Carbon Removal at Microsoft. "Our work with partners such as Mombak paves way for new conservation investors."
Disclaimers:
Net proceeds from bonds described herein are not committed or earmarked for lending or financing any particular World Bank project or program. Payments on bonds are not funded by any specific project or program.
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