The World Bank raised US$50 million ($67.1 million) through a bond structure it describes as unique and free from greenwashing — a growing concern among investors — and said it is lining up more of these deals for later this year.
The proceeds of the five-year bond will be used to support the World Bank’s sustainable development activities globally. Investors of this bond will forgo regular coupon payments. The money they would have received will instead be used to fund a project that will manufacture 300,000 water purifiers, with the aim of providing clean drinking water to about two million children in Vietnam.
The use of those purifiers is expected to reduce the amount of wood burned to boil drinking water, which would trim greenhouse gas emissions and generate verified carbon units — or VCUs. Instead of ordinary coupons, investors will receive semi-annual coupon payments linked to these VCUs. The outcome-based bond follows a rhino bond issued by the World Bank last year, which rewards investors more if the population of the animals grows.
The way the US$50 million debt is structured gives bondholders the ability to invest in a specific project, which makes it appealing to investors focused on impact investing, according to Michael Bennett, head of derivatives and structured finance at the World Bank.
This makes it different from a green bond, the largest category of sustainable debt by amount issued, which gives issuers the room to allocate proceeds to a variety of projects. The World Bank had helped pioneer the green-bond market by issuing such a bond in 2008, after the European Investment Bank issued the first green bond in 2007.
“This structure is very immune from any greenwashing concern,” said Bennett in an interview. “We’re completely transparent where the foregone coupon is going, what the risk is and what the outcome measurement metric is.”
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The structure will help provide funding to projects that otherwise wouldn’t get funded in the bond market, Bennett said, adding that the World Bank is planning another deal or two later this year. The deals may be larger in size, a spokesperson with the World Bank said.
The deal has piqued the interest of asset managers across the world, said Philip Brown, managing director and global head of sustainable debt financing at Citigroup Inc. The bank is the sole underwriter of the deal and has a pipeline of potential projects it’s planning to bring to the market after this one, Brown said.
“We talked to a number of large global asset managers whose response was, ‘this is really interesting, when you get to a billion dollars worth of transactions come back to me and I will raise funds against it as an asset class’,” Brown said. “We are in this early stage of development but it’s already very clear that there’s huge interest in carbon as an asset class.”
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Bonds linking coupon payments to carbon offsets are rare, and this is the first transaction where bond investors are taking the project risk directly, essentially ascribing value to the voluntary carbon credits, he said.
Investor Feedback
If the project goes as planned and generates enough VCUs, bondholders will get a return of about 100 basis points above a typical World Bank five-year dollar bond, according to the issuer. The bond was issued slightly below par, providing investors with a minimum guaranteed return of 0.52%.
Nuveen and Danish pension fund Velliv Pension & Livsforsikring are among investors that bought the deal. Velliv prefers to invest in deals with specific and targeted impacts, which leads to a “higher quality of our sustainability portfolio with an even greater impact per dollar invest,” Asbjørn Purup Andersen, senior portfolio manager at Velliv, said in an emailed statement.
Carbon offsets, which allow companies to pay a small sum in exchange for removing carbon from their balance sheets, are facing mounting scepticism over whether they’re effective in reducing emissions. While the quality or the magnitude of carbon credits produced in the water-purification project in Vietnam can be debated, it’s clear that a reduction in carbon is occurring, according to Stephen Liberatore, head of ESG and Impact for Global Fixed Income at Nuveen.
“This sounds like what you’re supposed to be doing, at least from the concept of how a market should develop,” he said in an interview.
Citigroup has also committed to buying the credit units up to an agreed capped amount by volume, before re-distributing them to other markets. Proceeds from the sale to Citigroup will then be passed on to bond investors as coupon payments. Mobilizing voluntary capital markets could help emerging markets that didn’t have access to such funding, said Citigroup’s Brown.
“Now, can it grow? The green-bond market took seven years from the first private placements back in 2007 to get to a billion dollar bond,” Brown said. “I think we’ll see a billion dollar carbon bond well before 2030.”
