Courtesy of the Financial Times, a report on an innovative new bond to combat waste, with repayments partially determined by sale of plastic and carbon offset credits:

The World Bank and Citi have launched a $100mn bond to combat waste, with repayments partly determined by the sale of plastic and carbon offset credits.

The bond, which priced late on Wednesday, will fund plastics collection and recycling projects in Ghana and Indonesia and highlights the growth of exotic debt structures for environmental causes.

The structure of the bonds means investors receive their principal back at the end of the seven-year term, guaranteed by the World Bank, plus a minimum interest payment of 1.75 per cent.

However, the bonds also have a feature that can give investors a better return than if they had bought conventional World Bank bonds of a similar maturity.

The two recycling projects generate and sell plastic and carbon offset credits to big companies that use large amounts of plastic.

Each plastic offset credit in theory represents a tonne of plastic collected or recycled. But some environmentalists have criticised offsets as indulgences that can be bought without reducing the original source of pollution.

Holders of the bond said they hope to get single-A credit returns with triple-A protection. If the price of plastic credits stays close to its current rates, investors expect total return from the bond to exceed similar World Bank debt offerings. The bank issued a mainstream bond with a seven-year maturity and a coupon of 4 per cent in early January.

The plastic credits feature “totally changes the underlying economics” for the bond, said Tongai Kunorubwe, head of environmental, social and governance on T Rowe Price’s fixed income team.

“There is a very clear sustainability angle,” he said, and also a financial interest in the bond “that resonates with the mainstream purely economically-minded portfolio manager”.

The new financial instrument joins an array of colourful bonds that have been sold in recent years in a bid to help the environment. Green bond issuance increased 12 per cent in 2023 to $489bn, according to a Merrill Lynch report. Another $4bn of so-called “blue bonds” were issued last year for water improvements. Social and sustainability bonds are also continuing to come to the market.

The plastics bond also shows the willingness of some investors to dabble in exotic debt products to align themselves with certain sustainable causes. The plastics bond marks the fourth so-called “outcome” bond issued by the World Bank since 2021.

In 2022, the World Bank issued a $150mn “rhino bond” to fund wildlife conservation in Africa. Last year, it launched a $50mn emissions reduction-linked bond, which funded a water purification project in Vietnam. Both bonds were issued at a discount to par to attract investors.

The bond’s guaranteed principal payment is expected to be AAA-rated by S&P, according to the World Bank. The bond will be listed on the Luxembourg Stock Exchange.

The launch is also a fresh stimulus for the nascent carbon credit market. The Intercontinental Exchange, Nasdaq and other exchanges have all launched products for carbon credit trading.

At the same time, communities in Accra in Ghana and Surabaya in East Java in Indonesia will get funding to expand recycling. Both sites employ local garbage pickers who collect plastics that can ultimately be recycled.

The low cost of making new plastic means “the economics of plastic recycling on a standalone basis are arguably in many instances just not working,” Kunorubwe said. “The World Bank is, we believe, ultimately keen to see the capital market step in and for market-oriented incentive mechanisms to develop.”