Sovereign sustainability-linked bonds have been proposed as part of an innovative series of “tiger ecosystem” financings that the United Nations Development Programme is preparing. The agency is working with four Asian sovereigns – including a sub-investment-grade name – on species number-linked deals and other structures that would represent landmarks in biodiversity investing if completed.
While reminiscent of the World Bank’s high-profile “rhino bond”, the UNDP financings are likely to involve different formats.
The agency's SLB proposal appears closer to the Amazon reforestation SLB that NatWest suggested for Brazil last year – though for now the Latin American sovereign is more focused on use-of-proceeds structures for its long-awaited entry to ESG bond markets.
Unrelated to the UNDP plan, a biodiversity SLB has also been proposed recently for “megadiverse” Malaysia.
Reversing the decline in tiger populations is vital as the animal is considered a keystone species. The loss of tigers has a disproportionate impact on the broader ecosystem in their territories.
“It is not just about tigers. It's also about sustainable development in a landscape,” said Gaurav Gupta, an adviser on nature investments at the UNDP.
He said there is scope in some of the countries for community-based forest management, such as restoring degraded forests.
SPV alternative
The rhino deal was a Triple A “payment by results” impact bond that pays a high coupon if the reference population grows. The sovereign SLBs may use the reference territory’s tiger population as a key performance indicator alongside a broader measure such as areas under effective management.
Some countries could opt for an alternative option such as a special purpose vehicle/fund structure. To lower risk for institutional investors, this format would probably involve external credit enhancement – potentially from multilateral development banks.
The complexity of cashflow analysis involved makes such deals likely to take longer to emerge than sovereign SLBs.
Part of the deals’ proceeds would go to meet significant upfront conservation costs, such as restoring degraded land and improving infrastructure. Some funding might be invested in ecotourism and other initiatives within the reference territory, while sales of carbon and biodiversity credits and revenue from "nature-positive" businesses such as sustainable agriculture or agroforestry could help service the bonds.
Either bond format is likely to carry longer maturities than the five-year rhino issue. Gupta said 10 years is more suitable for ecosystem protection and restoration.
He anticipates a mixture of sovereign SLBs and SPV/fund deals. "It might not be the case that all countries do the same," he said. "We must support the structure that fits best with their needs."
The quartet comprises very different credits, most notably a sub-investment-grade sovereign. The other three countries have experience of issuing ESG bonds though none has yet broken the LatAm monopoly on sovereign SLBs led by Chile, which launched the first local currency version of the product recently, and Uruguay.
Potential appetite
The UNDP is working on the deals with a broad array of stakeholders, including multilateral development banks as potential providers of concessional capital.
It is also in discussions with international corporates, particularly from the agricultural sector.
Potential demand appears strong. Investors have already contacted the UNDP about the transactions and some have indicated a willingness to accept below-market coupons due to the project’s high potential impact.
David McNeil, head of responsible investment research and innovation at the UK’s Insight Investment, who has called for standardised biodiversity bonds, said successful examples of projects that could be replicated and achieve scale were needed.
“Sovereigns and sub-sovereigns would be the natural area where you can get that scale relatively quickly,” he said.
Refiled story: Clarifies that project is in an exploratory stage