Sustainability-Linked Bonds for Tiger Conservation

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by KnowESG
KnowESG_Sustainability linked bond for tiger conservation
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The United Nations Development Programme (UNDP) is set to introduce an innovative series of "tiger ecosystem" financings next year, featuring sovereign sustainability-linked bonds (SLBs) in collaboration with four Asian nations: Cambodia, India, Malaysia, and Thailand.

While drawing parallels to the World Bank's well-known "rhino bond," the UNDP's approach is likely to adopt a distinct structure. Similar to the Amazon reforestation SLB proposed for Brazil previously, the UNDP's deals may initially focus on use-of-proceeds structures for the Latin American sovereign's entry into the ESG bond markets.

Recently, Malaysia has also considered the concept of a biodiversity SLB, further emphasising the growing importance of conservation efforts.

The urgency to reverse the decline in tiger populations stems from their status as a keystone species, exerting a critical influence on the broader ecosystem within their territories.

Gaurav Gupta, an adviser on nature investments at UNDP, underscores the significance of sustainable development in these landscapes, highlighting the potential of community-based forest management and the restoration of degraded forests as cost-effective interventions.

The rhino bond involved a Triple A "payment by results" impact bond, offering a high coupon if a reference population of rhinos increased. The forthcoming sovereign SLBs are expected to incorporate the tiger population within the reference territory as a crucial performance indicator alongside other metrics.

In addition to SLBs, some sovereigns might consider alternative special-purpose vehicle/fund structures. The UNDP aims to provide the quartet of sovereigns with diverse options. These transactions will involve multilateral development banks and other financiers purchasing junior and mezzanine tranches to enhance credit for the senior tranche, ultimately targeting institutional investors.

The proceeds from these deals will be primarily directed towards acquiring agricultural land and forestry concessions for conservation purposes. Additionally, investments in ecotourism and other initiatives within the reference territory are envisioned.

Biodiversity credits will likely be utilised to service the bonds, with the Biodiversity Credit Alliance, supported by the UNDP and the UN Environment Programme Finance Initiative, playing a key role in this regard.

These unique bonds are expected to carry longer maturities compared to the five-year rhino issue. Gupta suggests a 10-year term would be more suitable for ecosystem protection and restoration.

The UNDP anticipates a blend of sovereign SLBs and fund deals, recognising that each country may have different credit requirements. Cambodia, Malaysia, India, and Thailand differ significantly in their credit ratings and prior experience with issuing ESG bonds.

To make these transactions smoother, UNDP works together with a diverse group of partners, including multilateral development banks, who can provide concessional capital. Discussions also involve international corporations, especially those in the agricultural sector.

The potential demand for these bonds is robust, as investors have already expressed interest in the projects, some even willing to accept below-market coupons due to their high potential impact.

David McNeil, head of responsible investment research and innovation at Insight Investment, advocates for standardised biodiversity bonds, suggesting that sovereigns and sub-sovereigns are natural entities to drive scalability and replicability.

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Source: IFR


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