The IFC has sold $152m of five year bonds that come with the option of receiving the coupon payments in carbon offsetting credits originated from a Reduced Emissions from Deforestation and Degradation (REDD) project in Kenya.
Investors who take the carbon coupons can opt to retire the credits, offsetting their emissions, or to trade them, presumably hoping to do so at a profit (and at no additional benefit to the environment), although the secondary market for carbon credits is, by most accounts, sparse and illiquid.
BHP Billiton is supporting the bond, guaranteeing the Kenyan project that it will sell its $12m quota, even if investors opt to take the coupon in cash.
In one respect, this is superior to a regular green bond in that it offers a way for investors to donate, rather than invest, in the environment by locking funding into green projects, rather than loaning it out, and expecting a profitable return.
The benefits are clear. The Kasigau Corridor project in Kenya gets a guaranteed flow of business for five years. BHP Billiton commits up to $12m, of its own volition, to offsetting its carbon dioxide emissions. Given that REDD credits are not eligible for consideration in the EU’s Emission Trading System, this does seem to be a sincere effort on BHP’s part to contribute positively to the environment.
But what does the bond format contribute? The proceeds will go to fund IFC’s regular emerging market lending activities which, while laudable, could easily have been funded with conventional capital markets activity.
BHP has a history of donations to REDD projects on a bilateral basis, which it could have continued without IFC's bond. While the bond draws in new sources of private capital, those investors could have bought carbon credits independently.
So the bond’s value is reduced, as is frequently the case with socially responsible investments, to a publicity exercise. Such exercises can be very worthwhile — signalling virtue is one way to change market norms and encourage environmental protection — but if “forests” bonds take off, discretion should be exercised.
REDD is complicated — it comes down to paying people not to cut down forests, and therefore is hard to prove — and not all REDD credits are equally ecologically positive.
There are also a host of other thorny implementation concerns to be waded through for prospective investors. REDD projects open the door to the displacement or exploitation of indigenous peoples.
Viewing forests as carbon storage mechanisms, rather than ecosystems, means that there is scant incentive to protect wildlife. Measurement is erratic and prone to errors and manipulation and is complicated by the fact that when trees die, the carbon they store will be released back into the atmosphere. And, of course, loggers displaced from one site protected by REDD projects might simply move to another site. It is immensely difficult to evaluate the true impact of forestry protection projects.
While the Kasigau Corridor seems to be a well-scrutinised and well-managed project, each REDD institution requires careful and expert assessment.
Should forests bonds proliferate, a high standard of oversight will be key to ensure that investors are not funding unscrupulous or inexpert programmes.