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Carbon Investments: Addressing Concerns, Barriers, and Solutions in the Financial Market

Explore the challenges and opportunities in carbon finance, from traditional investor relationships to leveraging Carbon Emission Reductions Units (CERs) as financial assets. Learn about safety measures, liquidity, yield, and prudent investment practices in the carbon investment landscape. Discover possible solutions to funding barriers for project proponents and innovative financial structures for carbon deals.

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Carbon Investments: Addressing Concerns, Barriers, and Solutions in the Financial Market

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  1. Carbon Investments: Concerns, Barriers and Solutions A view from the other side of the fence

  2. The Traditional Investor Relationship Financial Resources BORROWER/ Project Proponent FUNDER/ Investor Promissory Notes/ Shares + Interest / dividend payments + Assets

  3. The Carbon Investment Financial Resources CDM Project Proponent FUNDER/ Investor Promissory Notes/ Shares + Interest / dividend payments + Assets + Emission Reductions Unit

  4. Emission Reductions Unit • A new financial asset • Priced in US Dollars or Euros • Unaffected by local interest and inflation rates • Not based on the financial profile of a company/ or project • Value is in the credibility of verification

  5. Investors now taking a second look at risky but necessary and highly rewarding investment opportunities In carbon finance.

  6. Investor’s Concern • Safety • Liquidity • Yield

  7. Safety • Investment Principal recovery • Interest / dividend payment streams reliability • CER Delivery and Ownership assurance

  8. Safety Measures • Investment Principal recovery • Security Options • REM / Chattel / Guarantees • Interest / dividend payment streams reliability • Security Options: • Assignment of receivables / PPA • SALE OF CERs • CER Delivery and Ownership assurance • Hedging of CERs and Legal Due diligence and packaging

  9. Safety Measures • Investment Portfolio Diversification • Project Type (i.e. NRE, Fuel Switching) • Technology (i.e. Hydro, Wind) • Region • Project size • GHG Emissions • Project Implementation dates

  10. Safety Measures • Comprehensive Due Diligence • Financial • Technical Feasibility • Legal • CDM-ability

  11. Liquidity Exit Mechanism

  12. Liquidity: Exit Mechanism Under normal circumstances “Profit Take” point in a specified time • Listing of shares in the Public market • Conversion from Debt to equity • Scheduled Redemption • Exercise of a Put or Call Option • Buy Out by Existing or Strategic Investors

  13. Liquidity: Exit Mechanism Under abnormal circumstances “Cut Loss ” point anytime How fast can I convert my investment or security assets into cash?

  14. Yield Reasonableness and Stability of Returns Versus investment benchmarks Or comparable investment options

  15. Yield Insulation from other major Risks • interest rates • Inflation • Currency • taxation

  16. Prudent Man Principle

  17. Project Proponent’s Concerns • Access to funding for: • Project Preparation and Development • Project Funding

  18. Project Proponent’s Barriers • Limited Financing Options or Mechanisms • Heavy collateral Requirements • Low valuations for Collateral • Excessive Equity Participation • Onerous Interest Rates • Requirement of a sinking fund, JSS… • Too Short a Borrowing Term • Unfair bias against small borrowers • Preferential Option for the Big Borrowers • Cumbersome Procedural Systems

  19. Possible Solutions

  20. Leveraging the CERs • Project Preparation and Development • Conditional Grant • Project Funding • CERs as additional security layer for • Principal • Interest payments • CERs in exchange for Resources • Financial • Technological • Technical/ Industrial Expertise

  21. Leveraging the CERs • Negotiate for the: • Lowering of interest rates • Shorten principal repayment period • Easing of certain burdensome collateral or equity requirements • Expedite your processing time

  22. The Carbon Deal StructureFunding via DBP- X Carbon Fund Partnership Carbon Fund $ CER Financial/Technical Resources CDM Project Proponent FUNDER/ (DBP) Promissory Notes Interest payments Assets CERs

  23. The Carbon Deal StructureFunding via DBP but CDM PP Direct to Carbon Fund Carbon Fund CERs $ Financial/Technical Resources CDM Project Proponent FUNDER/ (DBP) Promissory Notes Interest payments Assets CERs

  24. The Carbon Deal StructureBundling Via DBP Carbon Fund ss1 Financial/Technical Resources ss2 $ CER Small scale CDM Projects SPV FUNDER/ (DBP) ss3 ss4 Promissory Notes Interest payments Assets CERs ssn

  25. Hedging the CER Delivery and Price Risk • Don’t Sell all your CER’s. • Buy a CER Put Option • Do a Forward Purchase on other CERs • Invest in other Carbon funds if possible • Set aside ample funds to pay for the possible replacement cost

  26. Options on Reducing Investment Barriers: Setting up a Guarantee Mechanism Dev Country PFIs and GFls Guarantee Fund/ Corp MOA MOA PN CDM Project Proponent FUNDER/ (DBP) Php

  27. Options on Reducing Investment Barriers:Creating a CDM Project Debt or Equity Fund Dev Countries GFIs and PFIs CDM Project Debt or Equity Fund PN/Share + Financial Returns And/or CERs Financial/Technical Resources $ CDM Project Proponent

  28. Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines rguarin@dbp.ph

  29. Rey Guarin AVP for Climate Change Program and Special Projects Development Bank of the Philippines rguarin@dbp.ph

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