Sustainable Land Bonds
How governments can finance climate commitments
and strengthen rural economies

Photo credit: © Bridget Besaw

Executive Summary

This paper shows how tropical forest countries can tap mainstream bond markets and secure long-term capitalat extremely low net cost through the issuance of Sustainable Land Bonds to finance the large-scale transition tosustainable and low-carbon land management practices.
Sustainable Land Bonds (SLBs) are backed by the full faith and credit of the issuing country, but differ from regularsovereign bond issues in two important respects:•

The proceeds are utilized to finance the transformation of rural economies onto a low-carbon, sustainablefooting, thereby reducing net greenhouse gas emissions•

The issuer simultaneously enters into a long-term Results-Based Payment agreement with a third-party
that partially or even fully offsets the interest payments on the SLB, provided that pre-agreed levels ofland-based emission reductions are achieved

SLBs target institutional investors in mainstream capital markets (where interest rates are at record low levels anddemand for emerging market sovereign debt is high) and match with results-based payment agreements that pay
countries for achieving emission reduction outcomes. As such, they build on the success of the Green Bond market,
and go a step further by establishing a transparent link to outcomes in terms of national emission reductions.
SLBs secure funding up-front so that governments can make large-scale interventions, while results-based
payment agreements will lower the cost of borrowing—potentially to zero—so long as agreed emission reductions
are achieved.
SLB financing can help countries achieve their Nationally Determined Contributions (NDCs) under the Paris
Agreement while, at the same time, protecting the environmental infrastructure that supports rural production. By
doing this, governments can catalyze a virtuous cycle of inward investment, higher rural productivity and increased
employment, as well as meeting their climate mitigation targets.
March 2018

Photo credit: © Erika Nortemann

2Sustainable Land Bonds

Introduction

In this paper we show how tropical forest countries canaccess large amounts of inexpensive capital throughissuing SLBs that can be used to finance the largescale transition to sustainable and low-carbon land
management practices
SLBs target institutional investors in mainstream capital markets and match with results-based payment
agreements that pay countries for achieving emission reduction outcomes. SLBs secure funding up-front so thatgovernments can make large-scale interventions, while results-based payment agreements will lower the cost of
borrowing—potentially to zero—so long as agreed emission reductions are achieved.

Photo credit: © Erich Schlegel

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Sustainable Land Bonds

Land-Use and Climate Change

Agriculture and forestry are vitally important to theeconomies of many developing countries, especiallythose in the tropics, and provide income and foodsecurity for billions of people
One in three of all jobs worldwide are in agriculture, second only to the service sector, and this rises to 60% ormore in sub-Saharan Africa and parts of Asia1.
Demand for food and other resources is increasing2 as populations grow and as incomes rise. This demandis creating new commercial opportunities in land-rich countries, particularly those with well-establishedexport markets for their crops.

The key contributions of land-use
to the economies of developing
countries
In Indonesia,3 agriculture accounts
for about 15% of GDP, 30% of landarea, 41% of employment and some
26% of exports.
And in Brazil,4 the comparable
figures are 6% of GDP, 32% of landarea, 15% of employment and 40%
of exports.

Photo credit: © Bridget Besaw

However, rural productivity is especially vulnerable to the effects of climate change and the economic
potential of agriculture and forestry can only be fully realised if land is managed sustainably and key ecosystem
inputs are protected.
Existing agricultural practices, combined with conversion of forests, wetlands, peatlands and mangroves,currently contribute around a quarter of the world’s greenhouse gas emissions5, thus creating a negative
feedback loop that undermines the sustainability of rural economies.
In fact, without urgent changes to land management systems we will simply not be able to reach the targets set
out in the Paris Agreement of keeping global warming well below 2°C this century6 nor meet the Sustainable
Development Goals.

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Sustainable Land Bonds

Natural Climate Solutions

The latest research shows that improved land management regimes(‘natural climate solutions’) can deliver 37% of all cost-effective
CO2 mitigation needed to 20307. Rather than being a major sourceof greenhouse gas emissions, changing the way land is managed
can substantially reduce greenhouse gases and ultimately achieve
negative emissions
The importance of reducing land-derived emissions is widely accepted and more than 140 governments include
commitments to more sustainable land use in their Nationally Determined Contributions (NDCs)8. For example,
Indonesia9 has unconditionally pledged a reduction target of 29% (and a conditional reduction target up to 41%)
versus a business-as-usual scenario by 2030. Of its unconditional target, Indonesia projects that almost 60% of its
pledged emission reductions (497MtCO2e out of 834MtCO2e annually) will come from changes in the way forestsand peatland are managed.

Natural Climate Solutions and the Paris Agreement
Recent research, led by The Nature Conservancy,
indicates that natural climate solutions can deliver 37%
of cost-effective emissions reductions needed by 2030
to hold global warming below 2 degrees Celsius thiscentury. This adds up to 11.3 gigatonnes CO2e per yearby 2030, or the equivalent of all current emissions fromburning oil.

Natural climate solutions are proven ways of
increasing the capacity to sequester carbon and reducegreenhouse gas emissions in the world’s forests,
grasslands and wetlands. One-third of this mitigation
can be delivered at a cost of less than $10 per tCO2e—much cheaper than emerging technologies such as
bioenergy and carbon capture.

Climate mitigation potential in 2030 (GtCO2e yr-1)
1

2

3

4
*

Reforestation
Avoided forest conversion*

Natural forest management
Improved plantations
Forests

Avoided woodfuelFire management
Biochar
Trees in cropland
Nutrient management
Grazing—feed
Conservation agriculture

Agricultural Lands& Grasslands

Climate mitigation

Improved rice

Maximum with safeguards

Grazing—animal management<2°C ambition

Grazing—optimal intensity

Low cost portion of<2°C ambitions

Grazing—legumes
Avoided grassland conversion

Other benefits
Air

Coastal restoration

Biodiversity

Peat restoration
Wetlands

Avoided peat impacts

Water

Avoided coastal impacts

Soil

Source: Bronson et al, PNAS (2017)

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Sustainable Land Bonds

Sustainable Rural Economic Growth

Understandably, many developing countries are seeking to expand their output of agricultural and forest products
to meet demand. In the past 10 years, for example, Argentina has converted ten million hectares to cropland, whilst
Brazil has added eight million hectares10. Obviously, conversion like this cannot go on forever and, indeed, Brazil inparticular has been able to sharply reduce the rate of deforestation in the Amazon since 2010 though not yet to zero.
There are only two ways tropical forest countries can continue to increase their output of precious agricultural goods
like palm oil, cattle and soy without converting the valuable ecosystems critical to meeting their NDCs. One is byexploiting already converted but abandoned land; the other is by increasing the intensity of production on currently
used land. Both of these approaches require significant capital investment and the payback periods are often long.

Cattle herding on the Ponderosa farm in
Paragominas-Pará in the Brazilian Amazon.
Strategies to control deforestation and promote theresponsible production of soy and beef among farmers
and ranchers to create wealth, while also protecting
environmental infrastructure and reducing greenhousegas emissions
Photo credit: © Ami Vitale

The key challenge for governments, therefore, is how to reconcile rural economic opportunities with climate
mitigation. Put another way, these countries face the challenge of how to fund their transition to a low-carbon
economy. This challenge is greatest for those countries that have large areas of tropical forest and important
agricultural sectors, but limited financial capacity for investment in transforming land-use at scale.
To achieve widespread change in the way in which land is managed, governments will need to influence andleverage the existing domestic private sector investment that largely dominates agriculture and forestry(see Figure 1.). Spending by government is required to support policy frameworks and incentives that promoteredirection of private sector investment.
Domestic private
investment$168 billion p.a

Domestic public
expenditure$38 - $225 billion p.a
FDI around $3billion p.a
Public R&D $5billion p.aInternational ODA $14billion p.aof which, climate marked $8billion p.a•••$2.1billion from multilateral DFI$1.7billion from national DFIs, donors and agencies$0.5billion from public climate funds

Figure 1: Opportunity to redirect the hundreds of billions spent annually on agriculture andforestry (Climate Policy Initiative, FAO, 2012)11
6

Sustainable Land Bonds

Sustainable Rural Economic Growth, cont.

In this respect, governments can draw lessons from other areas of the economy, where incentives and policies havesupported new investment, for example in the development of renewable energy projects, which benefitted frompolicies designed to attract private capital.
Alongside carbon mitigation, sustainably managed land can protect against extreme climate events and can also
improve soil fertility, water resources and air quality. These co-benefits have substantial economic, social anddevelopmental value and are a pre-requisite for rural productivity to be maintained or enhanced in the future.
But they all require substantial investment with long payback periods.
Sustainability has become an important goal for major commodity traders whose customers in wealthy consumer
markets oblige them to seek deforestation-free commodities, including soy, beef, cocoa and timber. Initiatives suchas the Tropical Forest Alliance 202012 and the Blended Finance Taskforce for the Global Goals13 bring together large
corporations to collaborate in targeting investment in developing sustainable supply chains in supportive countries.

The environment and the economy
Major buyers increasingly seek
deforestation-free commodities,
including palm oil, soy, beef, cocoa
and timber

Photo credit: © Haroldo Palo Jr.

Some tropical forest countries are already tightening enforcement of laws that protect natural capital andsustainability, as Peru has recently done in response to trade in illegally logged timber14. However, transition comeswith a cost, with potential short-term consequences for rural economies affected by such otherwise desirable
changes in land-use practices, and this could present a substantial expense to government.
In the long run, there is no question that the rewards of protecting natural capital are high, but the funding tofinance transition will be in short supply without full recourse to the biggest pools of private capital.

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Sustainable Land Bonds

The rationale for Sustainable Land Bonds

Sustainable Land Bonds (SLBs) are long term fixed-rate bonds issued by a government (or government agency ordevelopment bank) and placed with investors in the mainstream international capital markets.
They are backed by the full faith and credit of the issuing entity and rank pari passu with all other bonds from thesame borrower. In this respect, SLBs are conventional debt instruments and could be structured either as regularbonds or Sukuk. They can easily be slotted the into a country’s normal bond issuance calendar.
Maturities would typically be 7-30 years, reflecting the timescale that investments in sustainable land development
might take to fully realize. It should be noted, though, that countries such as Mexico, Argentina and Austria havesuccessfully placed bonds with a 100-year maturity.
However, the SLB differs from regular bond issues in two important respects:•

The issuer uses the proceeds for sustainable land management initiatives to reduce net greenhousegas emissions•

The issuer simultaneously enters into a long-term results-based payment agreement (RBP) with a third-party
that is designed to partially, or even fully, offset the annual interest payment on the SLB, provided thatpre-agreed levels of land-based emission reductions are achieved in that year

Ministries ofAgriculture, Forestry,
Planning etc.

Emissions
Reductions
Plan

Interest
payments$
Ministry of
Finance$
Repay principal atmaturity$$
Emissions Reductions$$
SLB backed by full faithand credit of issuer

Results Based
Payers

RBP agreements

Bond Investors

Payments for Emission
Reductions

Figure 2: How Sustainable Land Bonds work

Even before taking account of the RBP agreement, it is likely that the interest costs will be slightly lower for a
SLB, just as we are beginning to see prices tightening for sovereign Green Bonds.
As we have seen, results-based payments are a well-established mechanism used by the World Bank and several
European governments. What is novel here is that the RBP agreement is attached to a simultaneous capital
markets bond financing. The cost of servicing the debt obligation by the issuing tropical forest country is mitigatedby its obligation to deliver emission reduction outcomes.
The SLB will send a strong public signal of a country’s commitment to making measurable transparent progress
towards meeting its NDCs. It will also likely enhance the country’s standing in capital markets more generally;
Rating Agencies, for example, are taking account of commitments to sustainable land-use and Paris Climate
contributions when evaluating sovereign debt ratings15.

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Sustainable Land Bonds

The rationale for Sustainable Land Bonds, cont.

The SLB structure is a collaboration between the hostcountry and the results-based payers and matches boththeir interests. This marks a step-change in delivering
emission reductions at scale.
There is no question that a SLB will be the “greenest”
of all sovereign Green Bonds, and will have the added
advantage of introducing to the Green Bond market
the concept of valuing outcomes, something many
commentators are arguing is critical to the long-term
prospects of the market.
It is also worth noting the exceptionally low level ofinterest rates prevailing today in US dollar and othermajor currency bond markets (figure 3). There has
never been a better opportunity to borrow long-termmoney at low cost. Or, said another way, the spread
between the cost of financing and the returns fromnature has never been higher.
From the perspective of investors, an SLB is identicalto a conventional sovereign or agency bond issue by
every financial risk/return analysis, but it will havethe advantage of qualifying as Green Bond based on atransparent Use of Proceeds. The sovereign sector of
the green bond market is rapidly evolving with countries
as varied as France, Belgium, Poland, Nigeria and Fiji
having recently issued in this sector16.

As SLBs tap into mainstream capital markets and thelargest institutional investors, the potential supplyof capital is in the tens or even hundreds of billionsof dollars. The only constraint will be the capacity of
results-based payers. As long as emission reductions
are achieved, the effective financing cost for the issuingcountry can be as low as zero and will certainly be lessthan normal funding cost.
From an issuer’s perspective, at a national level,
preparing for a SLB connects, by design, theenvironmental, economic development, and financearms of government. Because they are linked toresults-based payments for sustainable land-use,
SLBs encourage governments to draw up its sector
and regional programs, rather than simply focusing on
individual projects. This should encourage coordination
between relevant ministries such as finance, agriculture,
forestry, planning and environment, and between
central, provincial and local government.
A successful SLB financing can result in a virtuous
cycle of better investment conditions, higher
productivity, more resilient GDP growth, in addition
to improving climate mitigation outcomes.

Interest rates have not been this low inliving memory.

Source: TRADINGECONOMICS.COM | FEDERAL RESERVE

Figure 3: USD 30-year bond yield9

Sustainable Land Bonds

Payments for Climate Mitigation

Results-Based Payment Agreements

It is well established that wealthy nations need toprovide financial assistance to developing countries tosupport the necessary and urgent transitions in theireconomies, and this is already being supplied throughaid and development finance budgets. A subset of suchsupport includes climate finance—investment whichconnects sustainability, economic development andreductions in carbon emissions to help countries deliveron the Paris Agreement.

Tropical forest countries are uniquely positioned
to supply carbon sequestration and storage throughbiological growth—services that the world badly needs.

One way in which assistance is being provided isthrough results-based payment agreements thatreward countries for achieving specific climate-related
outcomes. These agreements for reduced emissions
from land-use are established through bilateral or
multilateral programs, such as the World Bank’s Forest
Carbon Partnership Facility Fund. Country donors
include the UK, Norway and Germany, which together
have pledged $5 billion in 2016-2018. Norway has also
signed $1billion Letters of Intent with both Indonesia
and Brazil, as well a number of smaller agreements withother countries such as Guyana, Liberia and Peru.

Those countries that commit to SLB finance will have astrengthened hand when negotiating RBP agreements asthey will already be demonstrating their commitment toachieving results.
While it may be possible to make an agreement based
upon a measure of CO2e emissions under either avoluntary or (pre-) regulatory scheme such as REDD+,
we think that early SLBs should be part of an urgent
movement to incentivize avoided deforestation activity
and reforestation at scale, and not risk getting bogged
down in carbon reporting. Measurements of forest cover,conversion of natural grasslands, incidences of wild fires,or other high-level data might be used as proxies foremission reductions.
In time, however, it should be possible to structureagreements as purchases of credits which in turn could
be sold or traded to meet offset obligations, or simply
retired. In this instance, assessments would be basedon transparent and scientifically-assured measures,agreed in advance. Payments for results at a national or
jurisdictional level are now becoming practical because
rapidly improving satellite and Light Detection andRanging (LIDAR) mapping technology is able to reliably
measure and monitor emissions at low cost.
Existing bilateral (ODA) agreements are not the only
way to transfer value and the payer does not have to be aforeign government of development bank.
A number of commercial entities, such as theInternational Civil Aviation Organization19 and some oil
majors, are currently looking at how to offset emissions
through purchase of land-based credits. The most
attractive offsets are those which represent ‘negativeemissions’, in essence, forests and grasslands thatcan be protected to increase their natural capacity forphotosynthesis and thereby carbon storage. Those
tropical forest countries that successfully demonstrate
their ability to deliver carbon storage through natural
climate solutions could position themselves well for
payment through future results-based agreements oroffset purchases.

Photo credit: © Bridget Besaw

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Sustainable Land Bonds

Outcomes Everywhere

The risk-sharing between tropical forest country
borrowers, capital market investors and results-based
payers embodied in SLBs is a step change in four
important ways:•

First, SLBs can reduce the borrower’s financing costs
for climate change mitigation•

Second, a government’s commitment to low-carbon
land-use is a catalyst for additional investment insustainable land-use practices, notably from theprivate sector•

Third, the funding raised by issuing a SLB canhelp a tropical forest country achieve sustainableeconomic and broader environmental gains,
especially in rural areas•

Fourth, an SLB and its related RBP agreement ties-ininternational support for sustainable land-use fromgovernments, lenders, NGOs and private investors. It
can also catalyze domestic support by encouraging
coordination between relevant government
departments and engaging local stakeholders

Healthier soils and more sustainable land management
practices can result in higher yields on a given areaof land, raising rural incomes, rolling up to more robust
GDP growth and higher tax revenues. Environmental
benefits in turn strengthen the land’s resilience tothe increased intensity and frequency of extreme
weather events caused by climate change, such as
storms and droughts.
For the global community, carbon storage capacity
is increased—the ‘technology’ is available and thereturns on ‘assistance’ are high. Progress towards theParis goals is accelerated. The providers of resultsbased payments can meet their development andenvironmental goals while helping advance theinternational agenda for combating climate change.
All this can be done if we start to tie the largest financial
markets in the world into the achievement of measurable,transparent outcomes.

Authors
Peter Wheeler

Stuart ClenaghanPeter Wheeler joined The Nature Conservancy as aLondon-based executive vice president in September
2013. Earlier in his career, he spent 25 years ininvestment banking in New York, Hong Kong, andLondon with Goldman Sachs and Standard Charteredand oversaw some of the earliest listings of mainland
Chinese companies on overseas stock exchanges.

Stuart Clenaghan is a senior fellow of the Climate
Bonds Initiative and a senior adviser to The Nature
Conservancy. He has extensive experience in capital
markets, having spent 23 years of his career at Lehman
Brothers and UBS.

Peter was a seed investor and board member of
Climate Change Capital until it was sold to Bunge in2012. He sits on the Board of Rift Valley Corporation,a dynamic African agro-industrial enterprise whichowns and operates a diversified portfolio of subsidiarycompanies across seven operating platforms in three
countries, Tanzania, Mozambique and Zimbabwe. He
is an active seed investor in a personal capacity ininnovative new companies in the renewables and low
carbon economies.
Peter is a board member of Social Finance, a social
enterprise dedicated to the transformation of the third
sector’s capabilities by developing access to a range ofinnovative financing methods, and was key architect inthe world’s first Social Impact Bond in 2010.

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Sustainable Land Bonds

Since leaving UBS in 2004, Stuart has specialized inenvironmental finance. He is a co-founder of Green Gold
Forestry Peru SA, now Peru’s largest forestry company
by area of forest and the only company in Loreto,
Peru’s largest region, to be certified by the Forest
Stewardship Council.
Stuart is a trustee of Botanic Gardens Conservation
International, which is the world’s largest plant
conservation network.

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11

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