World Bank hungers for more outcome bonds

IFR 2513 - 09 Dec 2023 - 15 Dec 2023
5 min read
EMEA, Emerging Markets
Julian Lewis, Tessa Walsh

The World Bank is ramping up its series of so-called outcome bonds with an imminent new issue to address plastic pollution and more to follow in new areas such as food production.

The development lender has mandated Citigroup to structure its next principal-protected outcome bond offering with coupon payments linked to waste collection credits, waste recycling credits and carbon credits from plastic collection and recycling projects.

The US bank is working with the NGO Plastic Collective on the deal, which is set for launch “in the coming weeks”, according to officials at Citi, which hosted a panel at the COP28 UN climate conference in Dubai on innovative capital market financing for environmental impact.

The World Bank’s next wave of outcome bonds are likely to focus on current and future food production. The Washington-headquartered supranational is also exploring project areas including agro-forestry and land use as it seeks to scale up this area of its US$50bn annual issuance.

“That is more than just an intention,” said Michael Bennett, head of market solutions and structured finance at the World Bank, speaking at the Citi event. "We are seriously working on several deals of a similar sort. There are more announcements to come.”

The supra also announced a partnership with the UAE ministry of climate change and environment to work on outcome bonds in connection with a food security initiative that the UAE announced last year at COP27 in Egypt.

The World Bank is also exploring digitising some of its ESG offerings, Bennett said.

Creating credits

Citi has already led three World Bank outcome bond landmarks – a US$100m note in support of the United Nations Children’s Fund during the pandemic; a US$50m emissions reduction-linker in February, which provided upfront financing for a water purification project in Vietnam; and a US$150m rhino bond a year earlier. Credit Suisse was joint lead manager on the rhino deal, for which Nuveen Asset Management was the lead investor.

Danish pensions and life insurance firm Velliv was the lead buyer of the five-year Vietnamese deal and also bought part of the rhino bond.

The Vietnamese deal appears closest to the new issue’s likely structure. One of the first of a new generation of ESG bonds designed to create carbon credits by avoiding CO2 emissions, it provided financing to give access to clean drinking water and reduce CO2 emissions by distributing water purifiers to some 8,000 schools and other institutions in Vietnam.

By providing an alternative to burning biomass to boil water for drinking, it should also help address deforestation in the country.

Investors forgo conventional coupons. Instead they are paid semi-annually in verified carbon units generated by the project, which Citi buys under an offtake agreement with the developer. The payout should significantly exceed the World Bank’s normal funding level to reflect buyers’ exposure to project risk, though this depends on the project producing the anticipated number of VCUs.

Like the new issue, the Vietnamese project generates VCUs registered on Verra, the leading carbon standard for the rapidly growing (if often criticised) voluntary carbon offset market.

Real impact

At a World Bank event at COP28, treasurer Jorge Familiar described the collection and recycling of plastic as “a major challenge that we are all facing”. He added that the institution has “others [outcome bonds] in the pipeline as well”.

That confirmed a point made in a recent IFR interview, where Familiar also commented on the World Bank’s recent raft of innovations.

“The reason why we are being pushed to innovate and to move the boundaries is because the challenges the world is facing are huge. It's a huge responsibility, but it's incredibly exciting,” he said.

Speaking at the World Bank event, Asbjorn Andersen, senior portfolio manager at Velliv, said he was “quite confident” that the plastics bond will be successful.

While Andersen did not disclose whether the Nordea spin-off will participate in the new issue, he said that “we have capital to deploy and … we think these kinds of structures are really interesting”, noting that Velliv is "focused on the real impact – or the additionality – that we can try to achieve and to increase the impact per dollar that we actually invest”.

Poppy Allonby, head of ESG enablement at US asset manager T Rowe Price, which invested in the rhino bond and runs a number of dedicated impact investment funds, agreed. “Our view is pretty constructive and optimistic about the interest and demand for impact investing,” she said. “Investors are flagging impact investment as an area that they would like to be exposed to.”

The World Bank also committed at COP28 to lift the amount it spends annually on climate-related projects to 45% of its financing by 2025, up from 35% now, part of a policy overhaul to better respond to climate change.