ESG Policy Perfromance Bonds were first presented by Z/Yen Group’s Prof. Michael Mainelli through Longfinance. They are built into Clarity Show Cases such as Super SMART Water Investing and Southern SMART City Bonds.
It is one thing to agree on a destination for sustainabilty, say some 10 billion people living well on one planet by 2050. But the big changes necessary to meet this vision need to go through incremental steps, each of which must be commercially viable in its own right. Policy Performance Bonds (PPBs) are commercially viable for todays’ markets, including under existing risk reward mandates of institutional investors such as pension funds and insurance institutions. They also 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.
e.g. 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.
e.g. 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.
Updated November 2015