Bonds are well known financial instruments for corporations to access large sums of finance. ‘Green bonds’ are a variation designed to finance environmentally focused projects. Ultimately, these instruments could channel the billions of dollars needed to reduce deforestation and encourage sustainable land use. However, our experience at Global Canopy Programme (GCP) shows that there are still some barriers to making this happen.
In 2013, GCP started the Unlocking Forest Finance (UFF) project, with the financial support of the German Government’s International Climate Fund. It aimed to build innovative financial mechanisms which would channel finance towards more sustainable land use. The initial idea was to bundle a portfolio of investments into a green bond, in order to raise the capital needed to implement these landscape-level investment packages.
GCP’s experience suggests necessary steps to make green bonds work for landscapes:
Given these constraints, green bonds for land use are still very rare, making up just 3% of green bonds issued, according to one estimate. As robust portfolios of landscape investments are built, such as those being developed by GCP in Latin America, we may see green bonds used more often in this sector. Nonetheless, the UFF project is looking for the more traditional instruments to raise capital for land use projects to build up the portfolio: equity and debt, combined with guarantees and insurance.
Other projects seem to be arriving at similar conclusions about how to pave the way for green bonds to happen: first build a sizable, robust portfolio then issue bonds to securitize it. However, different projects are investigating different routes to reach this goal. These include the Tropical Landscape Finance Facility with BNP Paribas and ADM Capital in Indonesia, which offers lending facilities and grant funds that may lead to bonds eventually.
Other interesting models are starting to emerge. In Madagascar, the EIB, Althelia and Conservation International have partnered with the Green Climate Fund to fund technical assistance and loans while preparing a green bond. And last November, the first ‘forest bond’ was issued by IFC on the London Stock Exchange.
If the barriers described above can be overcome, green bonds may offer increasing opportunities for agriculture, forests and people.
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