Ch. 5

Question 1

What is sustainable finance?

Answer 1

any kind of financial activity that takes sustainability into account, across asset classes (including equity, debt—both bonds and loans—and other asset classes such as commodities or derivatives) and across different products and services, ranging from corporate loans to mutual funds with shares of sustainable firms, offered to retail investors.

Question 1

What is green finance?

Answer 1

a kind of sustainable finance focused on environment-related risks and opportunities—often, but not necessarily, climate change. Other topics falling under the “green” categorization can include waste management, water usage, conservation of natural habitats, and mitigating biodiversity loss.

Question 2

What is climate finance?

Answer 2

financial flows relating to climate change, whether mitigation or adaptation

Question 3

What is ring-fencing?

Answer 3

the creation of a virtual barrier that segregates a portion of a company’s financial assets from the rest. This may be done to reserve money for a specific purpose, to reduce taxes on the individual or company, or to protect the assets from losses incurred by riskier operations

Question 4

What are green bonds?

Answer 4

bonds whose proceeds are earmarked for environmental projects

Question 5

What are social bonds?

Answer 5

bonds with earmarked proceeds for projects that will bring social benefits

Question 6

What are sustainability bonds?

Answer 6

bonds that are meant to simultaneously address both environmental and social objectives

Question 7

What is an SDG bond?

Answer 7

a bond linked to UN Sustainable Development Goals

Question 8

What are green loans?

Answer 8

loans that have been made for environmental and climate-related projects

Question 9

How do sustainability-linked bonds work?

Answer 9

the coupon paid by the issuer is linked to the issuer firm’s achievement of pre-agreed sustainability targets

Question 10

What does KPI stand for?

Answer 10

key performance indicators

Question 11

How do sustainability-linked loans work?

Answer 11

the interest rate on the loan is linked to a company’s achievement of certain sustainability benchmarks

Question 12

What are ESG ratings?

Answer 12

ESG ratings are intended to express and distill a holistic assessment of a company into one, easily understood and cross-comparable score or rating

Question 13

What are the shortcomings of ESG ratings?

Answer 13

One drawback is that the methods to calculate them are typically proprietary, making it hard for investors or lenders to see behind the scores they purchase from data providers. Another issue is that ESG ratings are not consistent with each other and are thus hard to compare, as rating methodologies differ substantially.

Question 14

What are the primary sources for ESG scores and ratings?

Answer 14

1) external providers, 2) discussions with the company, 3) corporate sustainability reports, and/or 4) regulatory disclosures.

Question 15

Which type of organization is responsible for the greatest share of all climate finance flows?

Answer 15

Public-sector development banks

Question 16

What characteristics separate a green bond from “standard’ bonds”?

Answer 16

Green bond funding must be for environmental purposes, whereas standard bonds have no limitations.

Question 17

How are ESG ratings typically used?

Answer 17

ESG ratings are used to determine which companies should be included in a sustainable equity fund.

Question 18

What is shareholder engagement when discussed in a sustainable finance context?

Answer 18

Shareholder engagement is when investors engage with company management to pressure them to adopt sustainable business practices and align with international sustainability goals

Question 19

What is the EU Taxonomy and how does it define sustainability?

Answer 19

The EU Taxonomy defines which types of economic activities, by sector and subsector, count as sustainable, with specific thresholds and conditions.