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World's first forest bond beats expectations

by Reuters
Tuesday, 8 November 2016 18:17 GMT

The credits paid to investors will be for the Kasigau Corridor U.N. project to protect 200,000 hectares of dryland forest in southeastern Kenya

* Addresses need for private finance for trees - analysts

* Miner BHP could provide up to $12 million

By Barbara Lewis and Karin Strohecker

LONDON, Nov 8 (Reuters) - A green investment that for the first time channels private money into protecting forests has raised twice as much planned, its issuers said on Tuesday.

A branch of the World Bank and miner BHP Billiton are backing the bond, which is also a first in allowing investors to opt to be paid in carbon credits rather than cash.

Three years in the making, the forest bond has raised $152 million from institutional investors, such as pension funds, to combat deforestation, seen as crucial to meeting a U.N. goal to keep global warming below 2 degrees Celsius.

Christian Grossmann, director of the climate change department at the World Bank's International Financial Corporation (IFC), said the aim was to be "a catalyser and have a demonstration effect" to inspire other issuers.

The IFC said the bond, issued on Oct. 31, had been intended to be half the size, but was increased because of demand.

It coincides with a two-week meeting of U.N. delegates that began in Morocco on Monday on implementing last year's Paris Agreement on climate change, which seeks to phase out greenhouse gas emissions this century.

Forestry is one of the issues that has proved a sticking point in previous negotiations and carbon credits, meant to be used for planting trees or reducing emissions in other ways, did not translate into action.

The IFC says its five-year bond followed extensive checks to ensure the money tackles a problem that is wiping out an area of forest the size of Costa Rica each year and accounts for 20 percent of greenhouse gases.

The bill to tackle deforestation amounts to many billions, but so far the green bond market - which Moody's Investor Service has said could reach $75 billion this year - has focused on energy saving and renewable projects, such as wind and solar.

"The most important aspect of this landmark transaction is that it shows how institutional investors in the debt capital markets could be an important source of (forestry) finance," Abyd Karmali, Climate Finance Executive, BofA Merrill Lynch, said.

The credits paid to investors will be for the Kasigau Corridor U.N. project to protect 200,000 hectares (500,000 acres) of dryland forest in southeastern Kenya, which is under threat from slash and burn agriculture.

Those who opt to receive credits - or permits to emit one tonne of greenhouse gas - can either use them to cover emissions or sell them on the carbon credits market.

Among mining companies, BHP has sought to be a leader in addressing climate risk.

For the new bond, it has provided a price support mechanism, meaning it could be called upon for a maximum of $12 million if investors chose the cash coupon rather than the carbon coupon.

(Additional reporting by Susanna Twidale Editing by Ruth Pitchford)

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