Carbon Investments:Concerns,
Barriers and Solutions
A view from the other side
of the fence
The Traditional Investor Relationship
BORROWER/Project Proponent
FUNDER/Investor
Financial Resources
Promissory Notes/ Shares+
Interest / dividend payments+
Assets
The Carbon Investment
CDM Project Proponent
FUNDER/Investor
Financial Resources
Promissory Notes/ Shares+
Interest / dividend payments+
Assets+
Emission Reductions Unit
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
Investors now taking a second look at
risky but necessary and
highly rewarding investment opportunities
In carbon finance.
Investor’s Concern
1. Safety
2. Liquidity
3. Yield
Safety
• Investment Principal recovery
• Interest / dividend payment streams reliability
• CER Delivery and Ownership assurance
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
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
Safety Measures
• Comprehensive Due Diligence
– Financial– Technical Feasibility– Legal– CDM-ability
Liquidity
Exit Mechanism
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
Liquidity: Exit Mechanism
Under abnormal circumstances
“Cut Loss ” point anytime
How fast can I convert
my investment or security assets
into cash?
Yield
Reasonableness and Stability of Returns
Versus
investment benchmarks
Or
comparable investment options
Yield
Insulation from other major Risks
• interest rates
• Inflation
• Currency
• taxation
Prudent Man Principle
Project Proponent’s Concerns
Access to funding for:
• Project Preparation and Development
• Project Funding
Project Proponent’s Barriers
1. Limited Financing Options or Mechanisms 2. Heavy collateral Requirements3. Low valuations for Collateral4. Excessive Equity Participation5. Onerous Interest Rates6. Requirement of a sinking fund, JSS… 7. Too Short a Borrowing Term8. Unfair bias against small borrowers9. Preferential Option for the Big Borrowers10.Cumbersome Procedural Systems
Possible Solutions
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
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
The Carbon Deal StructureFunding via DBP- X Carbon Fund Partnership
CDM Project Proponent
FUNDER/(DBP)
Financial/Technical Resources
Promissory NotesInterest payments
Assets
CERs
Carbon Fund
CER$
The Carbon Deal StructureFunding via DBP but CDM PP Direct to Carbon
Fund
CDM Project Proponent
FUNDER/(DBP)
Financial/Technical Resources
Promissory NotesInterest payments
Assets
CERs
Carbon Fund
CERs$
The Carbon Deal StructureBundling Via DBP
FUNDER/(DBP)
Financial/Technical Resources
Promissory NotesInterest payments
Assets
CERs
Carbon Fund
CER$
Small scale CDM Projects
SPV
ss1
ss2
ss3
ss4
ssn
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
Options on Reducing Investment Barriers: Setting up a Guarantee Mechanism
CDM Project Proponent
FUNDER/(DBP)
GuaranteeFund/ Corp
PN
Php
MOAMOA
Dev Country PFIs and GFls
Options on Reducing Investment Barriers:Creating a CDM Project Debt or Equity Fund
CDM Project Proponent
Financial/Technical Resources
PN/Share+
Financial Returns And/or
CERs
CDM ProjectDebt or Equity
Fund
$
Dev Countries GFIs and PFIs
Rey Guarin
AVP for Climate Change Program and Special Projects
Development Bank of the Philippines
Rey Guarin
AVP for Climate Change Program and Special Projects
Development Bank of the Philippines