Blog

Sliced: 🎙️To Bond, or Not to Bond

Click on any of the links to listen!


Today, we are thrilled to debut the second episode of “Untangling Climate Finance.”

In this episode, our guest is the wonderful and impressive Nathan Truitt, the Executive Vice President of Climate Funding at the American Forest Foundation (AFF). Nathan offers valuable insights into the mission of AFF and delves into their innovative Family Forest Carbon Program.

Jay and Nate explore AFF’s groundbreaking $10 million green bond designed to support the Family Forest Carbon Program. This pioneering bond, the first of its kind, is dedicated to generating nature-based carbon credits and empowers family forest owners to combat climate change, enhance forest health, and generate income through the carbon market. Notably, this novel green bond operates under a Master Trust Indenture Agreement underwritten by Morgan Stanley. Gordian Knot Strategies supported AFF in the issuance of this bond which garnered significant attention, with 34 roadshow views and three management calls. Impressively, it attracted $23 million in orders from three different investors.

Jay and Nate then delve into VM0045, a VCS Methodology developed for the Family Forest Carbon Program by AFF, TNC, and TerraCarbon. VM0045 is being used to generate the carbon credits tied to the green bond.

Finally, they discuss the challenges and opportunities in scaling climate finance focused on forest carbon projects.

As always, your questions, comments, guest recommendations, or interest in participating in an episode are welcome. Please reach out to Jay at: jtipton@gordianknotstrategies.com.


Click on any of the links to listen!

Sliced: The Search for our Hero Continues

Would you rather listen to Sliced? Click on the links below.

In a world teetering on the brink of climate catastrophe, our collective gaze turns toward the prospect of a global superhero – someone to rescue us from the impending climate crisis.

The United States, with its vast resources and global reach, might seem like a natural candidate. But as we presented last week, political divisions have tied the country’s hands, rendering it unlikely to unify in the battle against climate change for the foreseeable future.

Who else could step up to the challenge?

China, renowned for its economic prowess, population size, and impressive infrastructure projects comes into focus. However, before China can put on the superhero mask, a closer look reveals some inconvenient truths.

First and foremost, China is undeniably the world’s largest emitter of carbon dioxide, primarily due to its extensive reliance on coal-fired power plants. In 2006, China surpassed the US as the world’s largest polluter, a title its firmly held ever since. Presently, China emits nearly one-third of global emissions. Ouch!

While China has set ambitious climate goals, such as peaking emissions by 2030 and hitting carbon neutrality by 2060, translating these objectives into action is a monumental task. China needs to activate nearly $22 trillion USD between now and 2060. One mechanism to get money moving is green bonds. In 2020, China was the world’s second largest source of green bond issuance with $44 billion USD. That is an admirable amount of money but massively off the mark of what is required.

China is the world’s leader when it comes to producing and investing in green technologies such as electric vehicles, solar panels, and wind turbines. To compliment that, the country is rapidly installing domestic clean energy. However, it is also a mammoth dirty energy producer and consumer, currently burning fossil fuels to generate more than 80% of its energy.

Internationally, China is on the move. Their Belt and Road Initiative (BRI) is a sprawling infrastructure enterprise that has invested in more than 150 countries and international organizations. Chinese state officials report that the BRI, “has established more than 3,000 cooperation projects and galvanized nearly $1 trillion of investment.” However, the BRI illustrates wide complexities. Although BRI projects could significantly impact the global climate landscape, they also raise concerns about sustainability and carbon footprint, as some projects are associated with carbon-intensive industries.

China’s economic priorities often overshadow its climate commitments, leaving us to question whether saving the world from climate change is genuinely its primary focus. The BRI, while transformative, prioritizes China’s economic interests and influence in global markets, which may not always align with global climate goals.

Finally, genuine global climate leadership hinges on diplomacy and cooperation. For China to ascend to the role of the climate superhero, it must navigate intricate international relations and forge collaborative efforts with nations worldwide. However, it often appears that China’s diplomatic strategy ranks its national interests over the advancement of global climate objectives. In this respect, China and the US find themselves in a similar predicament, both giving precedence to their respective nations.

As the world continues its search for a climate superhero, China’s journey to assume this role is marked by numerous challenges. Yet, the question remains: who else might rise to the occasion?

In two weeks, we will shift our focus to an exploration of our European allies across the Atlantic.

Sliced: The Hero the World Needs

Would you rather listen to Sliced? Click on the links below.

Courtesy of major blockbuster films, we are perpetually immersed in the heroic universe of Marvel and DC, where superheroes tirelessly battle to avert utter catastrophe for humanity.

With the climate crisis escalating swiftly, the urgent reality is that every one of us in the tangible world requires salvation. This raises the pressing query: Where is our superhero?

We know trillions of dollars in investments are necessary for the world to decarbonize so we can mitigate and adapt to global warming. We also know that most of this finance must come from the private sector. However, the role of the federal government is both necessary and critical to get the capital moving both domestically and abroad.

So, will a country throw on the mask and cape and step up as the much-needed superhero?

Let’s begin with the world’s largest economy, the United States of America.

The chances of the US being that hero for the foreseeable future are not great. Passing significant climate policy has essentially come to a halt. The Inflation Reduction Act of 2022 (IRA), the world’s largest climate change investment ever, was entirely partisan with zero Republican support. The bill passed through a special policy procedure known as budget reconciliation and was only possible because Democrats had control of the White House, Senate, and House of Representatives – a reality that ceased to exist in 2022 as Republicans flipped the House. As impressive as the IRA has been, it is not enough to help us win the fight, so future investment and action is necessary.

The results of the 2024 presidential election are not a clear picture either. If the individual who is currently leading polls for the Republican nomination doesn’t find himself barred from taking political office in the next year, polls indicate the presidential race is presently a toss-up. The Senate is also up for grabs. Neither of these realities bodes well for finance aimed at climate change and environmental protection.

If Republicans were to win control back of both Congress chambers and the White House, conservative groups will be prepared for massive rollbacks. A slew of conservative organizations are feverishly working on Project 2025, a nearly 1,000-page playbook that will abolish the current “woke” agenda and take direct aim at environmental regulations, IRA finance, and the clean energy transition. If a Republican sits in the White House come January 2025, expect some version of Project 2025 to be enacted.

So, with Democrats no longer in complete control and an utter lack of appetite from Republicans to address climate change, it could be many years before Captain America suits up again to be a major hero in the climate finance battle.

Well, what about the world’s second-largest economy, China? Is China the hero that the world needs? The jury is still out.

We’ll investigate that next week.

Virtus: Bye, Hot Summer 🌻

August 2023

Photo: Jonas Horsch

We are a just few short days away from September. It’s hard to believe that summer is already winding down! Although for many communities around the world, the upcoming autumn is likely a welcome respite from what has been a brutally hot summer. Despite the crazy heat, it appears that many of our colleagues have been quite busy this summer. It’s the same story for us at Gordian Knot Strategies!

As many of our subscribers have already noticed, we launched this newsletter in July, as well as our weekly dispatch, Sliced, and our podcast, Untangling Climate Finance (more on this further down in the email). We hope that everyone has found some value from our flurry of content.

As always, we are open and eager to connect with anyone that wants to chat.

All the best,

Gordian Knot Strategies

We are Igniting Climate Solutions: Mobilizing$1 Billion in Impact Investment by 2030!

What can an American economist, ancient Mesopotamia, a Republican senator from New York, OPIC, and MIGA teach us about urgently mobilizing credit enhancement to support massive flows of investment in natural climate solutions?

In 1990, Harry Max Markowitz, an American economist, received the Nobel Memorial Prize in Economic Sciences. Despite his curiosity in physics and philosophy at school, Markowitz specialized in the field of economics at the University of Chicago. For his dissertation, he elected to apply mathematics to the analysis of the stock market. As he explored the field of stock market pricing that largely centered on John Williams’ analysis of stock prices as reflecting their “intrinsic value,” Markowitz realized that the prevailing theory lacked the analysis of the impact of risk. This fundamental insight caused him to develop his recognized theory of portfolio allocation under uncertainty, published in 1952 by the Journal of Finance.

Markowitz’s continued work in the field led to his modern portfolio theory (MPT), or mean-variance analysis, that is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk.It is humorous to note that the topic was so novel that, while Markowitz was defending his dissertation, Milton Friedman, another economist and statistician, is said to have argued that Markowitz’s contribution was “nice work, but … not economics.” 

To read the rest of this article, click here.

📚 Amidst this summer’s worldwide heatwaves, we found ourselves pondering the implications of a 1.5°C or 2.0°C future. And it seems we’re not alone in this contemplation. In his recently released book, “The Heat Will Kill You First: Life and Death on a Scorched Planet,” author and journalist Jeff Goodell masterfully investigates the multifaceted impacts our warmer planet has already had on life on Earth.

🎙️ Don’t call it a carbon tax! Akshat Rathi (Bloomberg Green reporter and Zero podcast host) and Catherine McKenna (former Canadian Minister of Environment and Climate Change) discuss Canada’s “price on pollution,” the importance of framing carbon pricing, and how the money generated is helping Canadian citizens.

✍️ A joint report from RMI and the Climate Collective – “Voluntary Carbon Market Landscape Guide” – dives into the voluntary carbon market (VCM) and presents its potential to align incentives, allocate finance, and reduce and remove emissions at the level necessary to stabilize the rapidly changing climate. The guide looks at trends, pain points, and innovations shaping the VCM today. 

📺 What will life on Earth look like in 2037? How about 2046 or 2059 or 2070? Scott Z. Burns and Apple TV+ present their version in Extrapolations, a collection of interconnected stories portraying the planet’s response to climate change from diverse perspectives.

🎙️ Our new podcast has launched!

On the pilot episode of “Untangling Climate Finance,” the host Jay Tipton chats with Sean Penrith (CEO, Gordian Knot Strategies).

Sean introduces the term “climate finance” to listeners. He also recounts his journey from an entrepreneur working outside the realm of climate change to his current position, running a private firm that mobilizes and activates climate finance for clients all over the world. 

To listen, click here.

The past month has seen significant activity in climate finance. Here are a few noteworthy headlines that stood out. 

The Nature Conservancy Announces Debt Conversion for Ocean Conservation in Gabon, First Ever in Mainland Africa

The Nature Conservancy (TNC) and the Government of Gabon have reached a financial arrangement to refinance $500 million USD of Gabon’s national debt, resulting in an anticipated $163 million USD for ocean conservation. This funding will support Gabon’s aim to safeguard 30 percent of its land, freshwater systems, and ocean by 2030.

New Zealand, BlackRock to Launch $1.22 Billion USD Climate Infrastructure Fund

New Zealand and BlackRock Inc. partnered on a $1.22 billion USD climate fund, focusing on clean energy and battery storage tech. This initiative marks BlackRock’s largest single-country low-carbon investment effort, aiming to accelerate New Zealand’s emissions reduction and drive the shift to 100% renewable electricity while enhancing business access to capital for growth.

The World Bank Provides $500 Million USD for Ecuador’s Green, Inclusive and Resilient Development

The World Bank approved a $500 million USD development policy loan for Ecuador to support government efforts to achieve inclusive, resilient and low-carbon development. The new funding rests on two main aspects. The first strengthens the fiscal framework, focusing on climate change challenges and governance for green bonds issuance and fiscal risk assessment in public-private projects. The second aspect emphasizes low-carbon development, prioritizing mitigation to blend climate and development, fostering green growth, and catalyzing private investment.

Brazil Rainforest States, Development Banks Commit to $900m USD Fund

Nine Brazilian rainforest states have united to pursue objectives outlined in the ‘Amazonia Forever’ initiative of the Inter-American Development Bank (IDB). The IDB and the Brazilian Development Bank (BNDES) have further pledged $900 million USD towards advancing the ‘Pro-Amazonia’ program. These goals encompass land tenure formalization, enhanced financing for local businesses in Amazon regions, and promoting sustainable development as an alternative to practices that harm the rainforest with the goal of opening access to finance for disadvantaged Brazilians.

A $150M USD Boost: Allowing Small Forest Owners to Profit from Carbon Credits

Small forest landowners in the US will receive $150 million USD in grants to engage in the carbon credit market and collaborate with corporations in need of carbon credits. This subsidy aims to enable those managing 2,500 acres or less, including underserved landowners, to participate more extensively in the expanding carbon market.

“There are literally trillions of dollars of opportunities for the private sector to invest in projects that will help save the planet. Our job is to go out and proactively find those opportunities, use our de-risking tools, and crowd in private sector investment.”

Philippe Le Houérou – CEO, International Finance Corporation

If you want to see more of our content, check out our weekly dispatch, Sliced.

Click here.


Interested in connecting? We would love to hear from you!

Contact us here.


Want to receive this newsletter?

Click here.

Want to unsubscribe?

Click here

Copyright (C) 2023. Gordian Knot Strategies. All rights reserved.1307 NE 102nd Ave Ste D #341, Portland, OR 97220

Our Take: Venturing Where Others Won’t

Photo: James Wheeler

What can an American economist, ancient Mesopotamia, a Republican senator from New York, OPIC, and MIGA teach us about urgently mobilizing credit enhancement to support massive flows of investment in natural climate solutions?

In 1990, Harry Max Markowitz, an American economist, received the Nobel Memorial Prize in Economic Sciences. Despite his curiosity in physics and philosophy at school, Markowitz specialized in the field of economics at the University of Chicago. For his dissertation, he elected to apply mathematics to the analysis of the stock market. As he explored the field of stock market pricing that largely centered on John Williams’ analysis of stock prices as reflecting their “intrinsic value,” Markowitz realized that the prevailing theory lacked the analysis of the impact of risk. This fundamental insight caused him to develop his recognized theory of portfolio allocation under uncertainty, published in 1952 by the Journal of Finance.

Markowitz’s continued work in the field led to his modern portfolio theory (MPT), or mean-variance analysis, that is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is humorous to note that the topic was so novel that, while Markowitz was defending his dissertation, Milton Friedman, another economist and statistician, is said to have argued that Markowitz’s contribution was “nice work, but … not economics.”

Markowitz’s contributions not only transformed investment theory but also influenced risk assessment and management practices across various industries, including finance, insurance, and beyond. His important insights provided a structured approach for understanding and managing financial risk, which remains a cornerstone of contemporary finance and risk management strategies. Credit enhancement and investment risk assessment are closely tied within the realm of financial markets, particularly in the context of fixed-income securities and debt instruments.

Credit enhancement is a strategy used to mitigate credit risk, which is a type of investment risk. The concept of credit enhancement has been employed in various forms throughout history, particularly in the context of lending and borrowing. A historical example of credit enhancement was the use of collateral in lending arrangements. Collateral, such as valuable assets or property, has long been used to secure loans and reduce the lender’s risk of default. This practice effectively enhanced the creditworthiness of the borrower by providing a tangible asset that serves as a form of credit enhancement. In ancient civilizations, such as Mesopotamia and Greece, collateral was often used as a way to secure loans and ensure repayment. For example, in Babylon, merchants could use land as collateral for loans, and failure to repay would result in forfeiture of the land.

The concept of credit enhancement has evolved over time with the development of financial markets and instruments. In modern finance, credit enhancement encompasses a wider range of mechanisms beyond collateral, such as guarantees, insurance, and credit derivatives, all aimed at reducing credit risk and enhancing the credit quality of an investment.

Formed in January 1971, the Overseas Private Investment Corporation (OPIC) was borne out of the realization by U.S. policymakers that private investment was a powerful generator of economic development and that there was an appropriate credit enhancement role for government in encouraging private investment engagement. OPIC achieved its mission by providing investors with financing, political risk insurance, and support for private equity investment funds where commercial financial institutions often were reluctant or unable to lend. Impact investing was also a key priority for OPIC, supporting efforts that sought to produce positive social impacts while generating financial returns sufficient to make these projects sustainable. Established as an agency of the U.S. government in 1971, OPIC managed to operate on a self-sustaining basis at no net cost to American taxpayers.

In the words of Senator Jacob Javits (R-NY) during the Congressional debate preceding the establishment of OPIC back in 1969, OPIC was the “first really big initiative that has come along in the foreign aid field almost since it began, which goes back to 1948 and 1949 … this corporation will for the first time apply business methods and business accounting procedures to the business operations of project development, investment, insurance, guarantees and direct lending—that is, to private activities which are sensitively and directly geared into the development of the less-developed areas which we propose to help in the foreign aid program.”

OPIC of course was not without its critics from both sides of the political aisle. Conservative Republicans condemned what they saw as corporate welfare. Liberal Democrats complained that public resources were being used to support investors instead of projects that helped disadvantaged communities. Opposition came from those who were critical of government involvement in private sector activities abroad. These critics believed that the government should not be directly involved in promoting or supporting private investments overseas. They argued that the private sector should operate without government intervention, even in international markets. Others raised concerns about the potential environmental and social impacts of certain projects that received OPIC support. Overall, OPIC was generally viewed as having made a positive contribution to promoting U.S. investments in developing countries and supporting economic growth.

In 2019, under the BUILD Act the United States International Development Finance Corporation (DFC) was established as a development finance institution following the merging of OPIC with the Development Credit Authority (DCA) of the United States Agency for International Development (USAID). The DFC now carries on the work of OPIC with a $60 billion agency portfolio (up from OPIC’s $29 billion) and also operates with the intention of achieving financial sustainability through the fees and returns generated by its investments and financing activities.

The Build Act transferred the Development Credit Authority from USAID to the DFC. The DCA offers direct loans and guaranties (typically 50%, but as high as 100%) of up to $1 billion for tenors as long as 25 years. These guarantees are intended to encourage private lenders to extend financing to underserved borrowers in new sectors and regions. In 2014, the DCA guaranteed USD 134 million of commercial loans that the Althelia Climate Fund issued to support forest conservation and sustainable land use, helping to remove 100 million tons of carbon—the equivalent of 18.5 million cars—from our atmosphere. This guarantee enabled the flow of private capital to finance sustainable land use models that delivered livelihood improvements, ecosystem uplift, and climate change mitigation outcomes.

OPIC’s slice of the market had declined in recent years, with investors turning increasingly to the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) that has substantially less restrictive eligibility requirements.

MIGA is the other player in the credit enhancement field. As an international financial institution MIGA also offers political risk insurance and credit enhancement guarantees. MIGA promotes foreign direct investment by providing political risk insurance and credit enhancement to investors and lenders against losses caused by noncommercial risks. MIGA was established in 1988 as an investment insurance facility to encourage confident investment in developing countries. MIGA insures long-term debt and equity investments as well as other assets and contracts with coverage lasting up to 15 years with a possible five-year extension depending on a given project’s nature and circumstances.

MIGA too has faced some negative sentiment from those that argued its impact has been hindered by regulatory bottlenecks, corruption, and inadequate infrastructure. Others have voiced equity concerns coupled with transparency issues on the assessment of potential environmental and social impacts of projects. That said, MIGA has successfully managed to promote direct private sector investment in countries that might be considered riskier due to political or economic instability. MIGA’s guarantees have helped mitigate risks for investors, making investments in these regions in sectors that include infrastructure, energy, agriculture, and financial services which are crucial for economic growth and development. MIGA has also developed innovative products and tools to address emerging challenges in investment, such as environmental and social risks.

Results from a 2010 survey that MIGA conducted found that political risk is the most important deterrent of long-term foreign direct investment in developing countries, even more than economic uncertainty and poor public infrastructure.

When we examine the deterrent that inhibits achieving a total investment in nature of $8.1 trillion between now and 2050 called for by the 2021 State of Finance for Nature report for us to have a chance at addressing our global climate, biodiversity, and land degradation challenges, it is imperative for companies and financial institutions to participate by sharing the risk and increasing investments in nature-based solutions. The mobilization of private capital for natural climate solutions is a key challenge over the coming decade. For context, the private sector delivered investment in nature-based solutions to the tune of $18 billion in 2018. The report found that using 2020 data, approximately $133 billion/year currently flows into natural climate solutions space, with public funds making up 86 per cent and private finance 14 per cent of that total.

One cannot dismiss the financial risks facing the intrepid impact investor wanting to marshal the resources to support natural climate solutions. In contemplating mitigation solutions such as reforestation, afforestation, sustainable land management, soil carbon sequestration, and the preservation of ecosystems like wetlands and mangroves impact investors have to navigate long payback periods, uncertainty on returns, regulatory and policy risks, and the vagaries of emerging nature-based markets that don’t have the benefit of track records, clear monetization pathways, and transparent pricing mechanisms.

To succeed at our goal of tripling investments in nature-based solutions by 2030 with 60% – 70% coming from the private market, we need to venture where others won’t. Specifically, we need to learn from others that blazed a path in the field of foreign aid, such as OPIC, DFC, and MIGA but for nature this time. This critical mission needs to be accomplished in a manner that crowds in private capital, creates innovative financing mechanisms, promotes public-private partnerships, and serves as crucial risk mitigation mechanism for our planet.

P.S. We have ideas….