Policy Performance Bonds (PPBs) reward governments and businesses who keep their promises.
PPBs are similar to sovereign, municipal, or corporate debt bonds. Essentially the investment is a loan (debt) to government or business at an indexed risk-reward rating, analogous with interest rate. The innovation is to add a sustainability target to the bond contract—lower the interest from the base rate if the investee meets the target, but increase the interest rate if the investee fails to meet the target.
- An investor in an index linked carbon bond (PPB) receives an excess return which could be an extra percentage point of interest for each $1 that CO2 emission certificate price is below target, or, a 1% for every 2% shortfall of a 2020 30% renewable energy target.
- An investor in an index-linked forest bond (PPB), such as for the Brazilian or Peruvian Amazon, receives an excess return if the state, municipality or forestry company (issuers of the bond) fail to reforest in 16 years time to the level of forestation in 1990. With the bonds paying an interest rate of twice the annualised gap, in 16 years hence, if forestation is the same as today, the bonds are paying 16%. If forestation increases by 0.5% a year or more, then the bonds pay no interest.
August 2014, SNJ/CVG