The World Bank (International Bank for Reconstruction and Development, IBRD) priced a five-year $50 million, principal protected Emission Reduction-Linked Bond that provides investors a return linked to the issuance of Verified Carbon Units (VCUs) expected to be produced by a project in Vietnam. The project aims to manufacture 300,000 water purifiers and distribute them to approximately 8,000 schools and institutions in Vietnam. It is expected to make clean water available to around two million children and to reduce greenhouse gas emissions by almost 3 million tons of carbon dioxide over 5 years.
The bond is an outcome-based financial instrument that mobilizes private capital to support the financing of a project with positive climate and development impacts – with outcomes measured by the generation of VCUs. Through the transaction, investors are supporting the up-front financing required to manufacture and distribute water purifiers for use in schools and other community service institutions across Vietnam that will reduce the burning of biomass traditionally used in boiling water for safe consumption. In addition to reducing greenhouse gas emissions, the purifiers help improve air quality, reduce associated health impacts, lower fuel costs and effort previously required to purify water, and help reduce deforestation.
“The Emission Reduction-Linked Bond comes at an important time in the global efforts to scale-up low-carbon solutions in developing countries. With this pilot transaction we can demonstrate another path for capital market investors to support the financing and implementation of climate action,” said World Bank Group President David Malpass. “Investors will directly benefit from the project’s success, as will the children in Vietnam who will get access to clean drinking water as a result. This structure can be replicated and scaled to channel more private capital to development and climate activities.”
The bond is 100% principal protected with the $50 million proceeds used to support the World Bank’s sustainable development activities globally. The Vietnam water purifier project is not a World Bank project. Investors in the bond will forego ordinary coupon payments, with the equivalent amounts instead being provided, through a hedge transaction with Citi, to support the financing of the water purifier project managed by a private project developer. Instead of ordinary coupons, the investors will receive semi-annual coupon payments linked to the issuance of VCUs by the water purifier project on the Verra Registry.
"Financing innovative, outcome-based solutions is part of Citi’s commitment to help create a fair and inclusive transition to a low-carbon economy,” said Paco Ybarra, CEO of Citi’s Institutional Clients Group.“This transaction demonstrates the important role we can play in supporting connectivity between the capital markets and institutions like the World Bank that can help reduce emissions, expand the availability of clean drinking water, and bring scale to voluntary carbon markets.”
"We are honored to partner with World Bank for this inaugural Emission Reduction-Linked Bond. While offering investors an attractive coupon, it will help deliver new, sustainable methods of water purification to schools across Vietnam,” said Tony Trzcinka, Senior Portfolio Manager, Impax Asset Management.
“Velliv is very pleased to facilitate such an important impact investment as a lead investor. The strong social profile, helping to secure safe drinking water for more than 8,000 schools and nurseries in Vietnam, while at the same time providing a significant green carbon credit makes this investment truly exceptional. At the same time the pioneer investment will provide an attractive return profile for our pension savers,” said Thor Schultz Christensen, Deputy Chief Investment Officer, Velliv Pension.
“We are excited to participate in this unique transaction given its attractive relative valuation, targeted additionality and template-like structure. The ongoing verification of the carbon credits by an independent third party aligns with our focus on providing capital that has a direct and measurable social and/or environmental impact,“ said Stephen M. Liberatore, CFA, Managing Director/Head of ESG/Impact – Global Fixed Income, Nuveen.
The Vietnamese Ministry of Education and Training will distribute the water purifiers to beneficiary schools and institutions throughout the country. The water purifiers are provided for free to the beneficiary kindergartens, nurseries, primary schools, secondary schools, high schools as well as community homes, that were selected due to a prior lack of access to safe drinking water.