The BwB Talk Series is where we bring innovative leaders in impact, finance, and the environment to speak with our network around the world. The BwB Talk Series helps generate new ideas for our network by bringing experts to share their deep knowledge of sustainability topics.
BwB Managing Director, Jennifer Faust, hosted the April edition of the series which meets us with Julie Edinburgh, former managing director at Credit Suisse and Mizuho Bank, and part of the structuring team for the Wildlife Conservation Bond, also known as the Rhino Bond. Julie has an extended experience in finance with over 24 years in investment banking, focused on debt private placements and structured bonds. She has worked at Credit Suisse, Mizuho Bank and University College, Oxford, as a consultant to the Finance Bursar.
“I think it was because I spent much of my career working on non-standard transactions that I was asked to work on a conservation project. Additionally, back in 2020 there were few people in Capital Markets at CS who had working relationship with the World Bank” commented Julie.
The Wildlife Conservation Bond is an outcome-driven bond, using financial innovation to fund biodiversity conservation. The WCB was issued by the World Bank’s Sustainable Development Bond program. It secured provision of additional funds, otherwise not available to the region, and use of Global Environmental Facility funds to pay for successful conservation outcomes.
“It is important to note that conservation is historically financed through grants and philanthropy which are based on outputs, not outcomes. There is little accountability for the parks which manage these outputs to reach outcomes. Grants are also typically allocated on an annual basis so parks may not be guaranteed financing for longer periods of time. This makes it very difficult for them to plan a strategy,” highlighted Julie.
Yet, in the case of the WC bond, through the World Bank issuance and private investors engagement, the coupons accrued on the bond and paid to the parks are expected to:
· Secure and grow critically endangered rhino populations
· Protect biodiversity and support improvements in planetary healthy
· Change how conservation is funded – transferring the risks of funding to private investors.
When asked about a success factor of the WC bond, Julie stated: “The Rhino bond is firmly and thoughtfully based on scientific evidence and robust metrics produced by experts in industry.”
Julie discussed some key features of the deal designed to protect investors (e.g., replacement agency event which sets the terms when a verification agent or the calculation agent are not able to perform their roles). “It is features like this that took a lot of time, thought and consideration for the structuring of the bond.”, she commented.
As with any marketing, it is important to understand your client’s expectations. “The World Bank was keen for this deal to be marketed like any other public market transaction and placed with as many investors as possible.”
Julie shared that the deal size was not large enough to be classified as typical public market transaction and would likely be considered as private placement by many investors, so additional marketing to this investor base was very important.
“For the institutional clients, it was often difficult to find the right Portfolio Manager for the product. The smaller size of the bond meant that it was not eligible for many of the traditional ESG portfolios.”
“With ultra-high net-worth investors there is a higher focus on sustainability and a greater history of risk tolerance for structured notes, but often higher expectation on returns and a preference for shorter maturities”, Julie explained.
Early investor outreach was key for this transaction, according to Julie. “This allowed for the structure to be modified so to reflect key investor feedback.”, she clarified. “For example, we added a bond rating and simplified the outcome-payment bands to meet the majority of the investor feedback.”
Pricing and Execution
Given the structure illiquidity and complexity, investors required a premium to traditional World Bank bonds in compensation for it. Once the documentation was completed and investors were able to review a Red document, the deal was ready for execution. At this time, CS decided to underwrite the bonds in order to officially launch and price the deal.
“The deal was successful because it was based on solid scientific evidence, which was tried and tested.”, highlighted Julie. “But success was also due to the high quality reputation of the participants on the transaction such as the World Bank, Conservation Alpha and ZSL. The deal can absolutely be replicated provided there is an outcome payer, willing to pay for success, you have scientific evidence to validate that success is achievable if terms are met and finally, if the data governing the project is clear and transparent.”
Julie concluded her presentation by sharing the lessons learned from this transition.
“First, keep the structure simple and transparent. The simpler the structure, the easier it is to sell. And secondly, involve investors as early as possible. I would even go far to suggest reverse engineer a security to meet investor demand."
One of the most engaging segments of our Talk Series is the Q&A session between our speaker and BwB. This talk’s Q&A segment was filled with insightful moments, a few of which we have captured below.
Alison Lobb asked if parks had to follow certain budgeting and investment processes.
“There wasn’t full flexibility.”, Julie answered. “Leading into this transaction, the parks identified what they would spend the money on and why they think that success would be achieved based on that. In the documentation there is a list of possible procurement allocations. These would include, for example, increasing the fencing perimeter around various enclosures to allow greater roaming rights; improving transportation; increasing watering holes; additional staff and resources.” An overview of these terms can be found on Page 18 of the Prospectus and in the Grant Agreement via this link.
Julie highlighted the importance of scrutiny for misuse of funds. “We, as an institution, took great comfort by the fact that the funds would be procured and monitored by a trusted, well-established organisation like the World Bank.”
Rufus Grantham, Managing Director, Global Head Retrofit & Built Environment Finance, followed-up on spending and deployment of capital. He asked whether additionality could be proven in this specific scenario.
Julie answered that additionality could be proven because the GEF payments on the annualised budgets to these parks was continuing as normal. “If a park was to be allocated funding in a given year, that money was continuing. Investors were very focused on what the money could be used for. Previous research provided a scientific basis for how the funding would help to protect the rhino population.”, elaborated Julie.
Chris Smith, BwB Managing Director, Global Head Sovereign Sustainable Finance, highlighted the potential drawbacks of the deal, which had low fees and low replication potential, despite its proven effects on conservation, and challenged Julie on the possibility of leading fee-generating transactions in the future for banks to enter this field more consistently.
Julie replied: “Going forward, there needs to be fees in order for banks to use their resources. You need to have revenue inside the deal to generate returns and in order for banks to be willing to market the deal. But I think, as innovation begins to grow and people do more, there will be less shame with setting fees for structuring a deal like this.”
Matteo Scalabrino, BwB Senior Analyst, further enquired:
“I have heard about different proposals on replicating the structure in other areas, such as food security and maternal health. How challenging do you think it would be to adapt this type of instrument from conservation to a different sector?”
“I do believe for certain areas it would be difficult to do that”, commented Julie. “But it does come back to data. If you can put rigid structures around the concepts of food security or maternal health, for instance, and actually measure and quantify success transparently, then the answer is yes, it can be replicated.”
Steve Smith, BwB Managing Director, Global Head Carbon & Forestry Finance, commented next: “You mentioned there needs to be a change in investors to do the work required. Was there a feeling that investors didn’t have the skill set to do the necessary work so, therefore, they had to change their process for this sort of innovative outcomes?”
Julie replied that she’d rather question their time and resource availability to dedicate to a small deal. “Were it a bigger deal, people would be more motivated to make the effort. There was a lack of willingness rather than a lack of skill set”, she commented.
“Surprisingly, in addition to our anchor clients, smaller investor accounts were the most active and willing to roll-up their sleeves and commit. There was an example of an account setting up a new biodiversity fund who monitored the product from the outset in 2016, followed it through and, eventually, bought some bonds. That’s dedication into a cause.”
“Another category were bank treasuries.” Julie further continued. “For many treasuries, the product was something that in theory could have been put in their treasury books and classified as HQLA. This would require them to take into account the conservation payments and view the bonds on a buy and hold basis. However, I think this will develop and there will be greater bank willingness to consider the success payment as a return and take pride in saying they are holding these bonds going forward.”
Christine Zhou, BwB Vice President, asked next: “You mentioned early investor engagement. What where the biggest changes requested that were implemented?”
“The complexity of this bond was a real hurdle.”, Julie responded. “Not only did we have to find people who were willing to buy an impact bond, but also people who care about conservation and about rhinos specifically. At the early stages in 2020, you had the additional complexity of the bonds potentially being denominated in South African rand and the complexity of processing payments in this currency. This was the biggest challenge we had to face with this deal. Thankfully, we had a sell-off in the interest-rate environment which allowed us to revise the structure back into dollars.”
Julie also discussed the verification process. “An area which we considered essential was the verification process. It was the early investor outreach that helped us not second-guess what investors want and allowed us to manage time more efficiently.”
Alison Lobb also asked if there were any local African investors or high net-worth families who participated or if it was firms only.
As far as Julie was aware, institutionally, there were not. In Julie’s view, this ultimately came down to conflict of returns with other assets available to them locally. “I would have also thought there was a greater appetite from major Asian investors as well given their focus on conservation and sustainability, especially with our ultra-high net-worth clients. Reason for this could be that local markets are so generous in yields; it really wasn’t enough return for them.
Another reason could have been the focus of the cause. Had it been different, closer to home, such as tigers in Malaysia, this could have made it possible to compensate the lack of a return.”
BwB Managing Director, Jennifer Faust wanted to find out more about the investor reaction past this transaction. “Also, given the lead time that such transactions take from inception until launch, do you know of any which are currently being under consideration?”, she asked Julie.
Julie replied that there has been expressed interest in upsizing the deal but, unfortunately, this was not possible. “With Conservation Alpha being an amazing partner in monitoring this transaction, it would be interesting to see what other projects they could monitor, what other animals and data can we represent in this way.”, further commented Julie. “I have heard about some new products related to underwater activity and species, discussions on tiger bonds and another one related to South African species but this is all the available information at this stage. These have a similar type of structure, being outcome-based.”