Winning climate finance continues to challenge the Global South, nations that want to develop but that contribute minimal CO2. After COP28, some hope emerged. It centers on the green bond, which emerging countries can issue and guarantee a payback to investors through carbon credit sales.
I spoke to two investment bankers who have come out of retirement to ensure that the developing world gets the money it needs to keep its rainforests standing and create 21st-century jobs. The alternative is giving farmers, miners, palm oil companies, and lumberers more access to those lands, allowing them to cut down the trees that absorb carbon dioxide.
Ian Gladen, managing director of BancTrust & Co., and Ian Robinson, chief executive of ITMO Capital, explained that green bonds function like traditional ones. They target green ventures, which in this case is the preservation of rainforests. For the last two decades, many countries have quantified their forests and preserved their trees. Corporations now have environmental, social, and governance missions, allocating specific percentages to green causes.
“Investors need to see countries go through the process of verification and see how robust the process is to get comfortable buying something genuinely helpful,” Robinson told me. “Companies that buy bad bonds or credits get the bad publicity. Some think it may be safer to do nothing than buy the wrong thing."
Developing nations must prove that they have accounted for their rainforests and monitor them to prevent deforestation. They can issue carbon credits to pay back the green bondholders if approved. UN-appointed inspectors carry out the accreditation process for Sovereigns under Article 5.2 of the Paris Agreement and take, on average, two to three years.
Will corporations get returns? Suriname is the first country to issue forest-based so-called internationally transferred mitigation outcomes or ITMOs under Article 6.2 of the Paris Agreement: 4.8 million carbon offsets. It’s a test case. If it works as planned, investors may line up to buy them.
Honduras will follow Suriname’s lead, issuing 10 million ITMOs in a relatively short order. The more rainforest nations to issue those carbon offsets, the merrier; it increases awareness and the demand for credits.
Countries have submitted their “global stocktake” – a snapshot of their climate progress. The United States and others are at a crossroads: This country aims to reduce its carbon emissions by 25% by 2025 using a 2005 baseline. However, 17% appears more realistic. After that, its goal is to cut carbon levels by 50% by 2030. The European Union aims to reduce its carbon emissions by 55% by 2030 from a 1990 baseline.
Governments set emissions limits. Those countries that can reduce them below the target can sell credits to those unable to do so. As the ceiling lowers, CO2 levels fall.
“When you buy bonds, you look at the balance sheet of the country and what you have in carbon credits,” said Gladen. “If the forests are maintained, countries will get paid yearly -- a string of royalties. Yes, there is a political risk, depending on who is in power. But the payments continue as long as governments preserve the forests.”
For example, Gabon’s military overthrew the president there -- one who had held power since 2009, although his family had ruled the country for decades. The new government is as committed to keeping the rainforests as the old ones.
Political risk is one concern. So is greenwashing. No doubt, companies must first deploy more renewables and energy-efficient technologies. But that won’t get them to net zero right now. Suppose they buy green bonds or carbon credits. In that case, they are giving money to rainforest nations that are either carbon neutral or carbon negative, allowing them to preserve their natural habitat and hire people for such jobs as forest rangers and tour guides.
Significantly, some of these countries, such as Honduras, suffer from extreme poverty. They see forest preservation as a job creator and a vehicle to prevent mass migration. And their trees absorb atmospheric CO2.
“The overall impact? We get to keep the rainforests,” says Robinson. “Companies can see that forest verification is solid and will take a risk on this asset. After a series of trades, the market gets established. Suriname is the first one, and Honduras will follow. Then, three or four other countries will join in. Companies will do an amazing amount of good and not get criticized for it.”
“The developed world is running toward a sustainable future,” adds Gladen. “Now, they must walk the walk and start paying.”
