Sustainable land bonds may offer a fresh path forward

Oil Palm factory worker in Santarem, Para state, Brazil. CIFOR/Miguel Pinheiro
Andrew Bilski
Andrew Bilski
12 April 2018

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BONN, Germany (Landscape News) — Tropical forest countries could soon use a new financial mechanism to access the capital they need to transition to sustainable, low-carbon land-management systems, according to a recent report by The Nature Conservancy in partnership with the Climate Bonds Initiative.

By tapping into mainstream bond markets and matching those funds with results-based payment agreements for achieving emission targets, the report says, sustainable land bonds (SLBs) can help deliver viable economies that meet the objectives laid out in the U.N. Paris Agreement and mitigate the impacts of climate change.

Innovative green investment tools such as SLBs will be discussed at the Global Landscapes Forum’s 2018 Investment Case Symposium on May 30 in Washington, D.C.

The forum will feature business cases with landscape improvement goals that meet or exceed requirements of profitability, governance, tenure, social inclusion, and monitoring and traceability. The event will also highlight examples of deals that are designed to match the particular aspects of natural capital investments.

More than a decade ago, so-called green bonds were created to fund projects that have positive environmental and/or climate benefits. Since the first contemporary green bond was issued by the European Investment Bank in 2007, the fledgling industry has grown as quickly as a bamboo grove in China.

Multilateral development banks were the sole issuers of green bonds until 2012 when the first corporate green bonds were sold. Since then the market has exploded, from nearly $10 billion in 2013 to over $40 billion in 2015. Last year, according to the Climate Bonds Initiative, green bond issuance hit a record $160.8 billion and could reach $250 billion this year.

The emergence of green bonds has been hailed by the United Nations as “one of the most significant developments in the financing of low-carbon, climate-resilient investment opportunities.” And a G20 communique in September 2016 called for development of, and cross-border investment in, local green bond markets.

The rapid growth of the international green bond market demonstrates how capital market mechanisms can use private capital to address global climate change and channel private sector funds to developed and emerging economies, according to the International Finance Corp., a member of the World Bank Group.

There are, however, two caveats: first, compared to the total outstanding bonds (around $120 trillion) the green bond market is still small. Second, most of these bonds are issued to finance sustainable transport, low carbon buildings and renewable energy. Very little is directed towards the land use space. The few land use-related green bonds that have been recognized by the Climate Bonds Initiative underpin timberland management in developed countries, according to Ivo Mulder, Finance and Private Sector Coordinator of the UN-REDD Programme.

Enter the Sustainable Land Bond

The authors of The Nature Conservancy/Climate Bonds Initiative report explain that SLBs are long-term fixed-rate bonds issued by a government (or government agency or development bank) and placed with investors in the mainstream international capital markets. They are backed by the full faith and credit of the issuing entity and rank on equal footing with all other bonds from the same borrower.

In this respect, SLBs are conventional debt instruments and could be structured either as regular bonds or Sukuk (Islamic-style  bonds). They can easily be slotted the into a country’s normal bond issuance calendar. Maturities would typically be seven to 30 years, reflecting the timescale that investments in sustainable land development might take to fully realize.

However, the SLB differs from regular bond issues in two important respects: The issuer uses the proceeds for sustainable land management initiatives to reduce net greenhouse gas emissions.  The issuer simultaneously enters into a long-term results-based payment agreement (RBP) with a third-party that is designed to partially, or even fully, offset the annual interest payment on the SLB, provided that pre-agreed levels of land-based emission reductions are achieved in that year.

The risk-sharing between tropical forest country borrowers, capital market investors and results-based payers embodied in SLBs is a step change in four important ways, the report says.

First, SLBs can reduce the borrower’s financing costs for climate change mitigation.

Second, a government’s commitment to low-carbon land-use is a catalyst for additional investment in sustainable land-use practices, notably from the private sector.

Third, the funding raised by issuing an SLB can help a tropical forest country achieve sustainable economic and broader environmental gains, especially in rural areas.

Fourth, an SLB and its related RBP agreement ties-in international support for sustainable land-use from governments, lenders, non-governmental organizations and private investors. It can also catalyze domestic support by encouraging coordination between relevant government departments and engaging local stakeholders.

While no SLB deals have yet been done,  there are several in progress. “We hope to see one done in the next 12 months,” says Peter Wheeler, executive vice president at The Nature Conservancy.

In the meantime, The Tropical Landscapes Finance Facility (TLFF) – a partnership between UN Environment, BNP Paribas, ADM Capital and World Agroforestry Center announced on Feb. 26 its inaugural transaction: a landmark $95-million sustainability bond to help finance a natural rubber plantation on heavily degraded land in two provinces in Indonesia. 

The main income-generating activity underpinning this bond is the production and sale of rubber from the extended plantation.

“The land use bond by the TLFF balances the need for enhanced agricultural output with job creation and climate benefits,” says the UN-REDD Programme’s Mulder. “This could also be a new channel through which private capital can be directed to support sustainable development goals.”

 

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