Carbon Removal Unit Linked Interest Bond
The World Bank (WB) has issued the world’s first carbon removal unit linked interest bond, aimed at providing investors with returns related to monetizing carbon removal units.
The bond issued this time is Amazon Reforestation Linked Bonds, in which investors use a portion of the coupon for Amazon reforestation projects and receive variable coupon payments from selling carbon removal units generated by the projects.
Related Post: World Bank Launches World’s First Plastic Waste Reduction-Linked Bond
Introduction to Carbon Removal Unit Linked Interest Bond
The World Bank plans to raise $225 million through carbon removal unit linked interest bond over a period of 9 years. Bond provides principal protection and offers a fixed annual coupon rate of 1.745%. The coupon is lower than the general bond issued by the World Bank, with a total difference of 36 million US dollars, which will be used entirely for the reforestation project of Amazon project developer Mombak.
Microsoft has signed an agreement with Mombak to purchase carbon removal units generated by reforestation project at a fixed price, and the funds generated by monetizing the carbon removal units will be paid to bond investors. The World Bank predicts that if reforestation project meets expectations, investors can receive an annualized rate of return of 4.362%.
In order to hedge the risk of carbon removal units, the International Bank for Reconstruction and Development (IBRD), a subsidiary of the World Bank, has signed a Forward Flow Agreement with HSBC. The International Bank for Reconstruction and Development will pay $36 million to HSBC, and HSBC will pay interest linked to carbon removal to the IBRD.
Carbon removal unit linked interest bond provides investors with a high rated investment, where they may receive additional returns while receiving principal and fixed coupon payments. The carbon removal units generated by reforestation project will be evaluated by Mombak and verified by an independent Carbon Credit Registry.
The World Bank believes that mobilizing private capital to support carbon reduction projects is crucial for achieving global climate goals, but reforestation projects often lack large-scale funding and therefore cannot be carried out. Carbon removal unit linked interest bonds can help these projects raise funds by securitization of the value of future carbon removal units. At the same time, bonds provide principal protection and can be listed for trading, which can attract market interest and provide climate, biodiversity, and social benefits.
Reference:
Investors Support Amazon Reforestation Through Record Breaking USD 225 Million World Bank Outcome Bond
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