World Bank Amazon Reforestation Bond: Concession, financial risk, and complexity

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The World Bank recently issued an ‘Outcome Bond’ to support reforestation in the Amazon. The instrument blends elements of Use of Proceeds bonds and outcome linked coupons, making it an innovative addition to the growing portfolio of sustainable financing solutions.

However, the outcome bond’s structure and the complexity of the underlying contracts may dissuade some investors, limiting its appeal. The $225 million World Bank-issued bond redeems at par and pays a guaranteed fixed coupon of 1.745%. Proceeds are ring-fenced to finance the IBRD’s Eligible Sustainable Development Projects.

Additionally, there is a variable coupon linked to the sale of carbon credits generated by Mombak, a Brazil-based reforestation company.

The contractual arrangements that determine the variable payouts are convoluted, and not all details are readily available to prospective investors. Moreover, the bond’s risk profile is complex. While the principal is guaranteed by the World Bank, the variable payments are linked to a developing market company with a very different credit profile.

This is an innovative way to provide impact capital, however future decreases in complexity could enable scalability.