The World Bank has priced a $50 million emission reduction-linked bond for Vietnam providing investors with a return linked to the issuance of verified carbon units (VCUs) expected to be produced by a new project.
The green project aims to make 300,000 water purifiers and distribute them to around 8,000 schools and institutions in Vietnam. It is expected to make clean water available to around two million children and to reduce greenhouse gas (GHG) emissions by almost three million tons of carbon dioxide over five years.
The five-year principal protected bond, priced by the World Bank on Wednesday at 97.38%, is an outcome-based financial instrument that mobilizes private capital to support the financing of the project with positive climate and development impacts, with outcomes measured by the generation of VCUs.
The issuer is the International Bank for Reconstruction and Development (IBRD), a development bank administered by the World Bank.
“The emission reduction-linked bond comes at an important time in the global efforts to scale up low-carbon solutions in developing countries. With this pilot transaction we can demonstrate another path for capital market investors to support the financing and implementation of climate action,” said World Bank Group president David Malpass.
“Investors will directly benefit from the project’s success, as will the children in Vietnam who will get access to clean drinking water as a result. This structure can be replicated and scaled to channel more private capital to development and climate activities,” he said in an announcement.
With financial group Citi acting as the lead manager for the transaction, the bond is 100% principal-protected with the $50 million proceeds used to support the World Bank’s sustainable development activities.
The Vietnam water purifier project is not a World Bank project. Investors in the bond will forego ordinary coupon payments, with the equivalent amounts instead being provided through a hedge transaction with Citi, to support the financing of the water purifier project managed by a private project developer.
Instead of ordinary coupons, investors will receive semi-annual coupon payments linked to the issuance of VCUs by the water purifier project on the Verra Registry.
Paco Ybarra, CEO of Citi’s institutional clients group, said: “This transaction demonstrates the important role we can play in supporting connectivity between the capital markets and institutions like the World Bank that can help reduce emissions, expand the availability of clean drinking water, and bring scale to voluntary carbon markets.”
Through the transaction, investors are supporting the upfront financing required to manufacture and distribute water purifiers for use in schools and other community service institutions across Vietnam that will reduce the burning of biomass traditionally used for boiling water for safe consumption.
In addition to reducing GHG emissions, the purifiers help improve air quality, reduce associated health impacts, lower fuel costs and effort previously required to purify water, and help reduce deforestation.
The Vietnamese Ministry of Education and Training will distribute the water purifiers to beneficiary schools and institutions throughout the country, according to the World Bank. The water purifiers will be free for the beneficiary kindergartens, nurseries, primary schools, secondary schools, high schools as well as community homes, that have been selected due to a prior lack of access to safe drinking water.
Vietnam is seeking to cut carbon emissions toward carbon neutrality by 2050.