Partnering for impact and innovation: A closer look at impact outcome bonds

Innovation is a cornerstone of impact investing. T. Rowe Price has been involved in several exciting examples of impact innovation—in the form of impact outcome bonds that link financial return to measurable and impactful development outcomes. The ability to partner with supranational organizations and multilateral development banks plays a crucial role in accessing innovative transactions. We believe that both impact and conventional fixed income strategies can benefit from these bonds—but it is important to have processes in place to identify well‑structured and attractive deals.

"...it is important to have processes in place to identify well-structured and attractive deals."
Ellen O’Doherty, CFA, Analyst

Building strategic alliances for impact

We believe that forming strong relationships with select supranational organizations on unique impact financing solutions can help set the stage and create opportunities for similar deals in the future.

We have worked with the World Bank (the International Bank for Reconstruction and Development) on several exciting transactions, including the Wildlife Conservation Bond (also known as the Rhino Bond), the Plastic Waste Reduction‑Linked Bond, and—more recently—the Amazon Reforestation‑Linked Bond. Supranational organizations like the World Bank are well positioned to leverage their capital markets presence to create pioneering financing solutions aimed at tackling the world’s most pressing issues. We have also partnered with the International Finance Corporation, a member of the World Bank Group, to grow the blue bond market to address the planetary and societal risks posed by the current underfunding of the blue economy.

"When we explore potential new partnerships, we look for organizations that support the most underfunded United Nations Sustainable Development Goals..."
Matt Lawton, CFA, Portfolio Manager

When we explore potential new partnerships, we look for organizations that support the most underfunded United Nations Sustainable Development Goals (SDGs), such as SDG 14 (Life Below Water) and SDG 15 (Life on Land). Organizations should have thorough environmental and social risk assessment processes in place and focus on projects that aim to avoid negative externalities.¹

The World Bank has a track record of being a high‑quality sustainability bond issuer. It played a significant role in creating the sustainable bond market, is able to access environmental and social projects needing finance, and has the infrastructure in place to support impact reporting.

How strong collaboration drives innovation

Collaboration promotes innovation in three key ways:

1. Increase impact investment opportunity: Working with supranational organizations can help provide opportunities for investors to support specific impact projects that they otherwise would not have access to. It can also enable access to unique bond structures.
2. Creates an avenue to direct capital to the most critical environmental and social pressure points: regular engagements with supranational organizations, structuring banks, and project developers create the opportunity to identify upcoming projects and suggest impact themes in line with underfunded SDGs.
3. Can improve financial and impact alignment: Structuring these transactions can take several months. During this time, asset managers can partner with market stakeholders to ensure the transactions are suitable for investors from both an impact and financial return perspective. When engaging with supranational organizations to discuss projects, asset managers can provide feedback and guidance on specific‑impact key performance indicators, and how they would be measured and monitored. On the financial side, asset managers might provide feedback or guidance on pricing and any additional considerations required for conventional fixed income strategies to be able to participate.

How conventional fixed income strategies can benefit from impact outcome bond deals

The potential benefits of impact outcome bond transactions are not limited to impact strategies. They can provide a defensive ballast and a liquidity premium* that is attractive to conventional fixed income strategies. For example, we found the World Bank deals that we participated in so far to be attractive due to the liquidity premium associated with the pricing. Capturing the premium associated with these types of transactions depends on whether the predefined impact objectives and milestones for the bond are met or exceeded.

The potential additionality can also be appealing for public fixed income impact investors. Moreover, these deals often involve directing new capital to nascent projects that may have struggled to get funding without participation.

Looking ahead

As more impact outcome bond structures potentially come to market over the next few years, we are excited to see how this market develops. Asset managers should consider structures on a case‑by‑case basis as the impact, and financial characteristics of each potential deal can vary significantly. We believe that it is important to work with all market stakeholders to structure any potential deal in a way that meets the needs of investors, while providing feedback on impact and financial elements.

"As more impact outcome bond structures potentially come to market over the next few years, we are excited to see how this market develops."
Ellen O’Doherty, CFA, Analyst

What do we look for in an impact outcome bond deal?

Impact considerations	Financial considerations
Credible projects that target specific environmental or social themes Additionality Measurability	Potential financial return How the transaction is priced How the deal is structured Project performance risks

How will investors be paid?
A bond principal is guaranteed by the multilateral development bank. Investors may receive additional return linked to the success of the outcome projects. The way in which this additional return is paid varies depending on the transaction structure and other factors. For example:

• The Wildlife Conservation Bond
  Investors receive potential additional return via a donor, in the form of a conservation success payment payable at maturity.
• The Plastic Waste Reduction‑Linked Bond
  Investors receive a coupon that includes a fixed guaranteed component and a variable component linked to the monetization of Plastic Waste Recycling Credits, Plastic Waste Collection Credits, and Verified Carbon Units from plastic waste collection and recycling projects.
• The Amazon Reforestation‑Linked Bond
  Investors are provided with a coupon that includes a fixed guaranteed component and a variable component linked to the generation of Carbon Removal Units from reforestation projects in the Amazon rainforest regions of Brazil.
   

Case studies

Impact outcome bonds are underpinned by strong collaborative elements. In the following case studies, we highlight three impact outcome bond deals with a focus on partnership and innovation.

The Wildlife Conservation Bond

T. Rowe Price is a lead bondholder in the Wildlife Conservation Bond (Rhino Bond), issued by the World Bank in 2022. The bond channels funds to conservation outcomes by targeting black rhino populations in South Africa.

What’s innovative about the transaction?

• The Rhino Bond was a first‑of‑its‑kind impact outcome‑based financial instrument—leading the way for similar transactions that facilitate additional financing to areas that investors would otherwise not have access to.
• It represents a new approach in conservation financing by enabling donors to fund conservation outcomes while passing project risks to capital market investors.

Who is involved?

• The issuer: The World Bank is the issuer and guarantees a principal and a yield on the amount borrowed
• Investors accept project outcome risk in return for a potential return if the project is successful
• South African National Parks and Eastern Cape Parks and Tourism Agency: Through the Rhino Bond, coupons are paid to these authorities to help protect and increase black rhino populations.
• An independent verification agent helps assess impact measurement data (e.g., the rhino population growth rate)
• The Global Environment Facility (GEF) makes a potential conservation success payment to investors on the maturity date. The World Bank acts as the GEF’s trustee.

Plastic Waste Reduction‑Linked Bond

In 2024, we collaborated with the World Bank on this outcome‑based bond, which offers the potential for a compelling combination of measurable environmental and social impact alongside an attractive economic return.

What’s innovative about the transaction?

• The groundbreaking use of plastic credits introduces a completely new way of financing plastic collection and recycling operations, in addition to preventing plastic waste from polluting the ocean.

Who is involved?

• The issuer: The World Bank is the issuer and guarantees a principal and a fixed yield on the amount borrowed.
• Investors expect a potential additional financial benefit if the projects and monetization of plastic and carbon credits perform as expected.
• The ASASE Foundation in Ghana and SEArcular in Indonesia: These plastic waste collection projects will receive the equivalent of the coupon income the World Bank would have paid bondholders. These project developers intend to generate and monetize plastic credits, which would in turn provide additional return to investors.
• An advisory agent supports and manages both projects.
• An independent verification agent applies its plastic waste reduction standard.
• A nongovernment organization applies standards to help ensure health and safety standards, the absence of child labor, and other social safeguards.

The Amazon Reforestation‑Linked Bond

This transaction mobilized private capital to support the World Bank’s sustainable development goals and provides financing to support the development of large‑scale native reforestation projects across Brazil’s Amazon biome. T. Rowe Price is one of the largest holders in the World Bank Amazon Reforestation‑Linked Bond, issued in August 2024.

What’s innovative about the transaction?

• With its innovative use of carbon removal units, this is the first bond that links investors’ financial return to the removal of carbon from the atmosphere, differing from transactions linked to the sale of carbon credits from avoided emissions.
• The largest World Bank outcome bond ever priced.

Who is involved?

• The issuer: The World Bank is the issuer and guarantees a principal and a coupon yield on the amount borrowed.
• Investors receive a guaranteed return that is lower than the ordinary return paid to investors for regular World Bank issuances of similar maturity.
• The reforestation developer (Mombak) will receive the equivalent of the coupon income, which will be used to acquire and reforest degraded land in the Brazilian Amazon biome. The reforested land is intended to generate and monetize carbon removal units, which would in turn provide additional return to investors.
• The offtaker (Microsoft): As part of an offtake agreement, the role of the offtaker is to purchase high‑quality carbon removal units from the developer through a take‑or‑pay offtake agreement. Microsoft has a AAA rating², which supported the credit analysis of the transaction.
• An independent verification agent is involved to certify the carbon removal credits produced.
• A nongovernment organization also serves as an external verification agent to help ensure that reforestation investments deliver robust benefits.