The World Bank has joined forces with Vincent Tchenguiz, the Mayfair-based entrepreneur, to invest in a $125 million South African environmental fund backed by profits from the arms industry.

The $20 million investment from the World Bank marks the first time it has participated in a project which aims to invest the billions of dollars made available every year whenever European and American defence companies strike deals with emerging economies.

The money will be pumped into a private equity fund dubbed the Evolution One Fund, the brainchild of Mr Tchenguiz's London-based Consensus Group — separately run from his younger brother Robert's pubs business.

Evolution One will then invest in a range of green technology ventures in and around South Africa, with extra funding, it is hoped from international defence companies who will buy from the fund vital green credits needed to help them win sales arms contracts.

Two northern European countries are also investing in the fund, Times Online has learned, thought to include the sovereign fund of Norway.

The World Bank, Mr Tchenguiz and the sovereign funds are looking to exploit a system known as off-set built into most global defence contracts. When selling to most countries, particularly in the developing world, defence contractors typically put aside between 1 per cent and as much as 6 per cent of the value of a foreign government sales deal, on top of the base price of the actual arms contract.

This off-set payment historically has been used to invest in building schools and hospitals but increasingly governments want to use the payments to develop so-called green technologies such as biofuels.

The World Bank is making its investment via the International Finance Corporation, a member of the of the World Bank Group. Haydee Celaya, IFC director for private equity and investment funds said the investment "is in line with the World Bank Group's strategy to support technologies that address climate change."

He added: "This demonstrates our commitment to being a leader in the clean energy and climate change sectors and to providing support to smaller businesses that are not likely to receive funding from mainstream private equity groups."

The bulk of the management work for Evolution One will be carried out by Inspired Evolution Investment Management whose board includes Guy Baxter, head of Consensus in South Africa.

It is possible that Evolution will then invest itself in clean-technology projects developed by universities including Imperial College, London, and the universities of Oxford, Cambridge and Quebec's McGill. Consensus Group is an investor in Imperial Innovations, the AIM-listed business arm of Imperial College which has struck a separate partnership deal with the College.