Ch. 5 Flashcards
What is sustainable finance?
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.
What is green finance?
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.
What is climate finance?
financial flows relating to climate change, whether mitigation or adaptation
What is ring-fencing?
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
What are green bonds?
bonds whose proceeds are earmarked for environmental projects
What are social bonds?
bonds with earmarked proceeds for projects that will bring social benefits
What are sustainability bonds?
bonds that are meant to simultaneously address both environmental and social objectives
What is an SDG bond?
a bond linked to UN Sustainable Development Goals
What are green loans?
loans that have been made for environmental and climate-related projects
How do sustainability-linked bonds work?
the coupon paid by the issuer is linked to the issuer firm’s achievement of pre-agreed sustainability targets
What does KPI stand for?
key performance indicators
How do sustainability-linked loans work?
the interest rate on the loan is linked to a company’s achievement of certain sustainability benchmarks
What are ESG ratings?
ESG ratings are intended to express and distill a holistic assessment of a company into one, easily understood and cross-comparable score or rating
What are the shortcomings of ESG ratings?
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.
What are the primary sources for ESG scores and ratings?
1) external providers, 2) discussions with the company, 3) corporate sustainability reports, and/or 4) regulatory disclosures.
Which type of organization is responsible for the greatest share of all climate finance flows?
Public-sector development banks
What characteristics separate a green bond from “standard’ bonds”?
Green bond funding must be for environmental purposes, whereas standard bonds have no limitations.
How are ESG ratings typically used?
ESG ratings are used to determine which companies should be included in a sustainable equity fund.
What is shareholder engagement when discussed in a sustainable finance context?
Shareholder engagement is when investors engage with company management to pressure them to adopt sustainable business practices and align with international sustainability goals
What is the EU Taxonomy and how does it define sustainability?
The EU Taxonomy defines which types of economic activities, by sector and subsector, count as sustainable, with specific thresholds and conditions.
