FINANCIAL INNOVATION:
HOW TO MOBILIZE PRIVATE SECTORFUNDS TO REDD+IFC Forests Bond & Climate Bonds for Forests

REDD+ International Seminar
Tokyo, JapanFebruary 6, 2019

IFC & CLIMATE BUSINESSIFC HAS BEEN A CRITICAL PLAYER IN CLIMATE BUSINESS FOR YEARS

IFC:• A sister organization of the World Bank and member of the World BankGroup• Largest global development institution focused exclusively on the private
sector in developing countries

IFC Climate Business:• IFC’s involvement in climate business started in 1980s, with its initial foray
into clean energy projects.
• In FY17, IFC invested $4.8 billion (own account and mobilization), which was
25% of IFC’s total investment that year.
• IFC is committed to meeting its climate goals of 28% of its total own accountcommitments and leveraging $13 billion in external private sector capital by2020.
Climate Finance of IFC Climate Business Department:• Climate Finance aims to use financial innovation and develop new financial
products to leverage private sector funds to climate projects and scale up
investments.
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WHY FORESTS? WHY REDD+?
PROTECTING FORESTS IS CENTRAL TO ADDRESSING CLIMATE CHANGE• Each year, the world loses an area the size of Costa Rica in forests. Deforestation andforest degradation account for up to 20% of the world’s greenhouse gas emissions—more than all cars, trucks, ships, planes and trains combined.

• Halting deforestation is essential to meet the global community’s climate goals and keep
global warming to 2 degrees Celsius. Just halving deforestation will require $75 billion to$300 billion in investment in the next decade.

• Climate finance focuses mostly on energy efficiency and renewable energy investments.
Capital market mechanisms can offer efficient ways to channel funds into protectingforests.

• The multi award-winning inaugural IFC Forests Bond issued in October 2016 was a firstof-its-kind mechanism to channel private funds toward forest protection.

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INAUGURAL FORESTS BOND
CONSERVATION THROUGH FINANCIAL INNOVATION• Private sector solution to a global challenge: US$152 million 5-year bond issues inOctober 2016 was first-of-its kind replicable, scalable solution to catalyze funding intoforest protection.

• First attempt to build capital markets infrastructure to channel funding for an area that hasotherwise received little commercial financial support, but is key to meeting climate goals.

• Principal-protected fixed income instrument issued under IFC’s AAA-rated program pays
the total $12 million coupon optionally in the form of carbon credits or cash.

• IFC partnered with BHP Billiton, a leading global resources company, to offer aninnovative price support mechanism equivalent to the value of the coupon over five years.

• Coupon supports forest conservation in Kenya and offers an option to deliver voluntary
REDD (forestry carbon) credits to bondholders.

• The Project supported by the coupon is expected to reduce deforestation, protect
endangered plant and animal species, and develop sustainable economic opportunities
for communities in Kenya• HSBC named this “green coupon” bond as an innovative extension of the green bondmarket.
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INAUGURAL FORESTS BOND
THE STRUCTURE
Carbon CreditMarket

3

1

7
Put Option
Provider2, 56

Investors

4, 7

Notes:
1. On the Issue Date, investors in the Notes will pay US$152 million, in aggregate, to IFC in issue proceeds, in consideration for the issuance of the Notes.
2. On an annual basis Noteholders will receive a fixed cash coupon with an option for a coupon partly or fully deliverable in VCUs per Note at a fixed priceof $5 per VCU.
3. In addition to having the ability to retire the VCUs, a noteholder may also independently sell them into the VCU market.
4. IFC will buy the VCUs generated by the Project during each generation period on an annual basis. IFC’s annual contract volume is 469,984 VCUs.
5. In respect of each interest payment date, IFC will use the VCUs purchased from the Project (per note 4) to meet investor demand for physical delivery ofVCUs, and it will put to BHPB all the unused VCUs, i.e. the amount of VCUs that noteholders have not elected to receive. Maximum annual volume
puttable to BHPB is 469,984 VCUs.
6. Investors are not exposed to any credit or performance risk of BHPB.
7. The total cash value of the price support provided by BHPB will be escrowed on or prior to the issuance date of the Notes. If any portion or all of theannual price support made available by BHPB under the Put Option is not used, then BHPB, by agreement with and via IFC, will apply the remainder topurchase VCUs from the Project for BHPB’s own account4

OUTCOME OF INAUGURAL FORESTS BOND
LESSONS LEARNED AND COUNTERMEASURES• $152 million over-subscribed and listed on the London Stock Exchange Replicate and scale up!
• No bondholder has chosen coupon in the form of Verified Carbon Units but incash in the past two coupon payments
 Countermeasures are needed to boost investors demand and develop
carbon markets• Assisted Verified Carbon Standard based voluntary REDD+ project in Kenya Immediate action was needed to help forest conservation even it is involuntary markets rather than wait another few years for sovereign-driven
compliance market to emerge
 Now countries are moving towards jurisdictional REDD+ under ParisAgreement• $12 million, equivalent to the total $ value of coupon payments are invested ina REDD+ project More funding is needed, especially upfront financing
5NEXT STEP: CLIMATE BONDS FOR FORESTS PROGRAMPROGRAM GOALS

1) Help host countries meet international goals
under Paris Agreement
2) Provide additional funding to support private
sector REDD+ activities
3) Boost investor demand by developing
market for forestry Emission Reductions(ERs)
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THE CLIMATE BONDS FOR FORESTS (CBF) PROGRAM
HOW TO ATTAIN THE GOALS?

SupportJurisdictional
Framework

AdditionalFunding toPrivate Sector
REDD+ Activities

Boost demandand ER Markets

7• Align with Forest Carbon Partnership Facility (FCPF) program managed byWorld Bank• Capacity Building to enhance work done by FCPF, with focus on improving
benefit sharing with private sector activities and avoiding double counting• Build capital markets infrastructure to channel funding to forestry sector• Buy ERs from private sector activities• Extend upfront debt finance to private sector activities• Boost investor demand by marketing ERs through Intermediaries• Build and support ER markets in anticipation of implementation of the Paris
Agreement

CBF PROGRAM COMPONENTS
FIVE COMPONENTS

Components

Objectives•

Climate Bonds for Forests($450 million)••

Use AAA-rated capital markets instrument to channel privatesector investment to forest conservation$75 million (equivalent to the total value of annual interestpayments) will be invested in forest conservation$450 million Bond proceeds will be invested in IFC climate
projects

Debt Finance Facility($30 million)•

Provide upfront debt finance to forest carbon positive
activities implemented by private sector entities

Carbon Market
Commitment ($11.25million)•

Intermediary commits to pay a floor price and sells a portionof ERs to international investors taking the role of boostingER markets.
Intermediary helps bond investors monetize ERs.

•Liquidity Support Facility($63.75 million)•Provide some price support to reduce the downside risk forIntermediary that sells a portion of ERs

Capacity Building($7.5 million)•

Assist host countries to incorporate private sector REDD+
activities in jurisdictional REDD+ and share benefits in amanner that includes private sector
Assist host countries to meet international climate goals bytechnically supporting integration activities (e.g. nesting)•8THE STRUCTURE
Carbon Market
Legend:ERs
Cash
GCF Funds
Warrants(Warrants orCarbon Credits)

ERs

CashERIntermediaries

ERIntermediaries

Liquidity Support
FacilityERs

Revenuesharing(Warrants orERs)

Cash forERs

Concessional
Fund

Cash Interest

ER Warrants
Capacity Building
Program Funding

Exercise of Warrants
ERs

FERPAsCashERPAs

Country Govt. ofREDD+ Activities

REDD+Activities

9ERs

Cash
Project Loan

Debt Service mainly
via FERPA Cash Flow

IFC + Private
Sector (60%)
Concessional
fund (40%)(Cash)

Debt Finance Facility(Cash)

BondInvestors

CBF – FOREST EMISSION REDUCTIONS PURCHASE
AGREEMENT (FERPA)
BRINGING ADDITIONAL FUNDING TO REDD+ ACTIVITIES

1. IFC to invest alongside the FCPF Carbon Fund•

Expected ER purchases of $75 million (3mm credits/year for 5 years)•FERPAs signed with private entities in target countries for FCPF
compliant ERs•

FCPF & IFC to work with governments and stakeholders to develop an
approach allowing IFC to purchase ERs where benefit accrues to privateentities (as IFC must transact with private entities)
Carbon Fund

ERPAs

$900 million of ER purchases

FCPF Countries

Governments

ERPAs$75 million of ER purchases
FERPAs10

Private Sector
Activities inSelect Countries

LIQUIDITY SUPPORT FACILITY
BOOSTING DEMAND FOR FOREST RELATED ERS
2. Intermediary to boosts investor demand• Private sector global climate commodity trader(s) (Intermediary) will beengaged to sell a portion of ERs sourced under FERPA• $63.75 million Liquidity Support Facility (LSF) supported by Concessional Fund
will provide some price support to reduce the downside risk for Intermediary• At least half of the total 15 million ERs (7.5 million ERs) will be delivered toIntermediary and will be sold to international investors• By exercising warrants, Bond investors can choose annual coupon payment inthe form of ER• Intermediary(ies) will also help Bond investors to monetize ERs or options onERs. Mechanism TBD but may include providing a “bid” for ERs. No financial
commitment will be required.

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DEBT FINANCE FACILITY
BRINGING ADDITIONAL FUNDING TO REDD+ ACTIVITIES

3. IFC to provide upfront lending•$30 million debt funding to private sector entities to accelerate
implementation and bolster capacity to deliver ERsERs
Payment forERs ($)
FERPAPrivate Sector
Entities

Upfront DebtFinance ($)

Debt Service mainly
from FERPA cash
flow ($)(and other lenders
potentially)
Subordinated Tranche
supported by ConcessionalFund12

CAPACITY BUILDINGHELP HOST COUNTRIES MEET INTERNATIONAL GOALS

4. Capacity Building•$7.5 million funding to complement FCPF in helping governments
incorporate private sector activities•Specific needs by each country will be analysed on a case by case basis.
Examples are outlined in the next slide.
Target Countries
TA from Readiness Fund

Up-Front Lending to Activities

13Governments

Private Sector
Activities inSelect Countries

CAPACITY BUILDING - CONTINUEDHELP HOST COUNTRIES CROWD IN PRIVATE FUNDING

Examples:• Enhancing benefit-sharing agreements to ensure that private sector
entities within FCPF jurisdictions can receive ER titles and sell them
• Facilitating distribution of ERs from governments to implementation
activities• Establishment and refinement of national carbon accounting systems toenable coherence with FCPF jurisdictions• Strengthening of stakeholder engagement platforms and processes toensure full free prior and informed consent of all stakeholders, and gendersensitivity of program14

PROGRAM BENEFITSProgram will further efforts to help countries ensure private sector
engagement in jurisdictional REDD+



Provides pathway and mechanisms to channel private sector investment
in forest conservation

 Up-front debt financing fills funding gap for implementation of activities

IFC capital market solutions will boost demand, liquidity and pricetransparency for REDD+ ERs

Provides Capacity Building to integrate private sector actions into
jurisdictional accounting system, and enhance benefit sharing
mechanisms to ensure inclusion of private sector activities

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THANK YOU!

Kiyoshi Okumura, CFA
Senior Investment Officer
Climate Business Department
International Finance Corporation
kokumura@ifc.org+1 (202) 473-0157

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