Stockholm (NordSIP) – As the world continues to produce hundreds of millions of tons of plastic annually, the pollution they create and the lack of corporate action remains a significant problem. To address this issue, plastic credits have emerged as a potential tool for companies to finance the collection and recycling of plastics where normal market mechanisms do not naturally facilitate these activities. However, plastic credits are still new, niche and not uncontroversial.
To help overcome some of the issues underlying plastic credit, the International Bank for Reconstruction and Development (IBRD), a member of the World Bank (WB), partnered with the Plastic Collective and Citi to issue a US$100 million green Plastic Waste Reduction-Linked Bond. The transaction counted with the participation of Denmark’s Velliv Pension and Sweden’s Skandia.
How Do Plastic Credits Work?
According to Verra, a nonprofit that provides verification systems for plastic credits, these new tools are a “finance mechanism that allows companies to make downstream investments in new or expanded plastic waste collection and recycling infrastructure, particularly in geographies that are disproportionately impacted by plastic pollution (such as Least Developed Countries and Small Island Developing States).”
The principle is similar to carbon credits. Companies can purchase plastic credits from organisations such as the Plastics Collective based on the amount of plastic that they produce. These organisations then channel the revenue from the sale of plastic credit to environmental projects (such as recycling facilities) that will eliminate an equal amount of plastics produced by businesses. This way, each plastic credit represents one ton of plastic that has either been collected or recycled.
However, according to the World Bank, the plastic collection and recycling industry suffers from a timing misalignment. “The funds from the sale of plastic credits to businesses that want to be part of the solution often aren’t available until the positive outcome is achieved, sometimes years after the initial investment – creating a significant and often insurmountable timing mismatch,” the WB explains.
The WB’s PWRLB
According to the WB, the new Plastic Waste Reduction-Linked Bond (PWRLB) channels up-front financing from capital market investors who want to support plastic waste collection and recycling activities. The funds will support two plastic waste and recycling projects: a community-based project to expand the number of waste collection and recycling sites in Accra, Ghana, and to scale efforts to reduce ocean-bound plastics in Surabaya, Indonesia.
Investors in the bond will forego a portion of ordinary coupon payments, with the equivalent amounts instead being provided, through a hedge transaction with Citi, to support the financing of the projects selected by Plastic Collective UK, who manage the projects’ plastic and carbon credit programs.
An amount (approximately US$14 million) equal to a portion of the coupons that normally would be paid to PWRLB investors by the WB is front-loaded and paid in two instalments to the Plastic Collective by Citi. The Plastic Collective in turn channels the financing to the projects in Ghana and Indonesia. Via this mechanism, “investors are providing approximately US$14 million in up-front financing required by the projects to increase capacity at existing facilities, expand to new collection and recycling sites, and install food-grade recycling equipment.”
Meanwhile, the returns on this bond are tied to Plastic Waste Collection Credits, Plastic Waste Recycling Credits (plastic credits) and Verified Carbon Units (VCU) expected to be generated by the two projects in Ghana and Indonesia. PWRLB investors will receive annual coupons composed of a fixed amount plus payments linked to the sale of a portion of the plastic and carbon credits produced by the projects.
“I am incredibly proud of the collaboration between the World Bank, Plastic Collective, and Citi in launching this fourth Outcome Bond. Our collective effort innovatively plans to use VERRA-registered plastic credits to support two projects to reduce plastic pollution — a huge global challenge with particularly devastating impacts on emerging markets. This Outcome Bond allows fixed-income investors to support development projects that would otherwise struggle to secure financing. We’re also responding to investor appetite for transactions with direct and quantifiable development impact. We are hopeful that these transactions will inspire others – and drive further positive change,” said Philip Brown, Global Head of Sustainable Debt Capital Markets at Citi.
The Terms of the PWRLB
The WB’s PWRLB has a 7-year maturity and was priced at par. Citibank acted as the sole structuring agent and bookrunner of the transaction. The coupon on this bond is divided in three parts according to the transaction summary.
In addition, if the projects perform in terms of generating and monetizing the expected number of plastic and carbon credits, investors can expect to earn a total return above World Bank ordinary coupons. Asides from the 1.75% fixed interest amount, this bond pays an extra Plastic Credits Linked Interest Amount and a VCU Linked interest amount, which are capped and linked to the project’s credit generation.
The Plastic Credits Linked Interest Amount is “linked to the number of Plastic Credits issued from the projects, subject to a cumulative ceiling of $19,468.25 per Specified Denomination.” The VCU Linked interest amount is “linked to the number of VCUs issued from the projects, subject to a cumulative ceiling of $532.99 per Specified Denomination.”
The bond is 100% principal protected with the $100 million proceeds used to support the World Bank’s sustainable development activities globally. The plastic collection and recycling projects in Ghana and Indonesia are not World Bank projects.
Scandinavian Pensions Join In
This transaction attracted demand from pensions funds in Denmark and in Sweden, as well as form other investors, such as T. Rowe Price.
“Velliv is very pleased to be a lead investor in the Plastic Waste Reduction-Linked Bond. This impact investment will support developing countries with local infrastructure for plastic waste collection and recycling projects to reduce land & ocean plastic leakage in regions where the challenge is greatest. At the same time, the projects will help to alleviate poverty by providing a sustainable source of income for local waste pickers,” said Asbjørn Purup Andersen, Senior Portfolio Manager, Velliv Pension.
“Skandia is very pleased to participate in the Plastic Waste Reduction-Linked Bond. It is a very good example of how pension capital can both generate a good return for our customers and at the same time contribute to solving some of today’s global challenges. The large amount of plastic that pollute the world’s oceans are everyone’s responsibility. I’m pleased that Skandia is participating and contributing to part of the solution,” said Alexander Onica, Head of Fixed Income and FX, Skandia.
“We are very proud to partner with the World Bank on the Plastic Waste Reduction-Linked Bond. This innovative transaction will provide needed and targeted funding to support plastic collection and recycling efforts within Indonesia and Ghana. We believe this outcome-based bond offers a compelling combination of measurable environmental and social impact alongside an attractive economic return,” said Matt Lawton, CFA, Global Impact Credit Portfolio Manager, T. Rowe Price.
