17 October 2016
The International Finance Corporation (IFC) has launched a "first-of-its-kind" forestry bond that allows investors to be paid using carbon credits.
Investors in the Forests Bond can choose to have the coupon paid in cash, or carbon credits generated by the Kasigau Corridor project in East Kenya, or a combination of the two.
The Kasigau Corridor project is one of the largest REDD+ (reducing emissions from deforestation and forest degradation) projects in the world. It is expected to offset 1.4 million tonnes of carbon dioxide emissions each year for the next 30 years.
The coupon will be priced in-line with IFC's normal credit of the same maturity. The price of the carbon credits, which are verified under the CCBS (Climate, Community and Biodiversity Standards), will be fixed at $5 per credit.
Investors who opt to receive the verified carbon units can either retire them to offset their carbon footprint or sell them in the offset market.
IFC will purchase the voluntary carbon credits from the project and will then distribute them when the coupon falls due.
Mining giant BHP Billiton will provide a liquidity support mechanism, which will see it buy credits from IFC should investors opt to be paid in cash.
The development bank says its role will be as a "market maker", helping connect investors with viable offsetting projects, meaning that they don't need to go through a broker.
IFC will take on the project-level risk to ensure that projects deliver the verified carbon units, and has committed to buy the necessary amount of carbon credits over the next five years to ensure the project is sustainable.
The five-year bond, which is being marketed to institutional investors and will be denominated in dollars, will have a minimum size of $75 million and a maximum size of $150 million. Proceeds from the bond, which is not labelled "green", will be used to finance IFC's normal projects.
NGO Conservation International, which is one of the oldest REDD+ project developers, is providing input on REDD+ eligibility criteria and will advise on the sustainability credentials of the project.
Future Forest Bonds may see REDD+ projects aggregated to provide further scale.
Bank of America Merrill Lynch, BNP Paribas and JP Morgan are lead placement agents for the deal.