Fresh off of a second consecutive year of winning Environmental Finance’s award for Impact Investment Team of the Year, the global fixed income team at Nuveen was riding high. Led by Stephen Liberatore, CFA, lead portfolio manager for and head of Nuveen’s impact fixed income strategies, the team was feeling energized after receiving the peer-voted award, which validated the work done to address the world’s most pressing social and environmental issues, all while delivering attractive financial returns. As the team beamed that chilly winter morning in February 2024, Liberatore got a call regarding a potential new issue for a $100-$300 million outcome bond related to the Amazon rainforest—what could be the largest outcome bond to date. As one of the leading investors in fixed income products focused on social and environmental outcomes, Liberatore was commonly called upon to help structure new issues. Indeed, Liberatore and his team had long sought a more templatized structure for these specific projects and programs—opportunities that highlighted the scale of fixed income market solutions, and the key to rapid deployment of capital in the impact investing market. As with most new issues, the deal seemed straightforward—in the complex way that defined most blended finance products. In this instance, the World Bank would provide investors with a coupon that included a fixed guaranteed component and a variable component linked to the generation of Carbon Removal Units (CRUs) from restoration projects in the Amazon rainforest regions of Brazil. It would be the first bond linking investors’ financial return to the removal of carbon from the atmosphere versus past transactions linked to the sale of carbon credits from reduced emissions. However, Liberatore and his team were focused on use of proceeds, and with new parties to the transaction, the team had to ensure that the reforestation efforts were direct and measurable, and that the purchaser of CRUs was reliable. Further, carbon credits continued to be fraught with uncertainties—an important consideration when analyzing the risk associated with the investment.
