Chapter 5 Flashcards
Green SF
SF focused on environmental related risks and opportunities
Climate Policy Initiative
an NGO that assembles a comprehensive accounting standard - seen as gold standard in tracking climate financial flows from public and private sources
SF products come in 3 broad varieties
- use of proceeds (earmarked and ring-fenced for S use (ex: green bonds))
- instrument is linked to S targets (through interest rate penalty or reward on achievement of a specific target)
- selection criteria for inclusion or targeted engagement with management of a company (ex: S equity funds)
Green Bonds
Proceeds are earmarked for environmental projects
1. separately labeled
2. proceeds are ringfenced
3. planned use of proceeds is reported to prospective bondholders ex ante and to current bondholders once projects are implemented
–> investment banks handle underwriting
Green Bond Principles
- use of proceeds
- process for project evaluation and selection
- management of proceeds
- reporting
Use of proceeds
should provide clear env. benefits (ex: renewable E, poluttion prevention and control)
Process for project evaluation and selection
Issuer of green bond should clearly communicate to investors
1. env. S objectives
2. process to determine how projects fit within eligible green projects cases
3. related eligbility criteria to identify and manage potentially material env. social risks
Management of proceeds
Net proceeds of G bonds should be credited to a sub-account, moved to sub-portfolio or otherwise tracked by issuer and attested by the issuer linked to lending and investment operations for green projects
Reporting
Issuers should have up to date info on use of proceeds and renew annually until full allocation. AR should include list of projects which G Bond proceeds have been allocated + external review
Social Bonds
bonds with earmarked proceeds for projects that will bring social benefits
S Bonds
combo of G and social bonds
Green loans
expected to ring-fence ; borrowers expected to report on use of proceeds
S linked Bonds (SLB)
coupon paid by issuer is linked to issuer firm’s achievement of pre=agreed S targets
S linked loans (SLL)
Interest rate on the loan is linked to a company’s achievement of certain S benchmarks
- measured by S performance targets (SPT) measurement improvements in borrower’s S profile
KPI (Key performance indicators)
Measure how well a company is performing - . They provide clear data that shows whether efforts are effective, whether emissions are decreasing, or if climate-related goals are being met.
–should be relevan, measurable, externally verifiable, and able to be benchmarked
Main sector with green loans
- power sector (85%)(renewable E, P generation)
- utilities
- real estate
SLLP framework (SLL principles)
- relationship to borrower’s overall S strategy
- target setting - measuring the S of the borrower
- reporting
- review
SLLB framework (SLLB principles)
- Selection of KPIs
- Calibration of SPT (S performance targets)
- bond characteristics
- reporting
- verification
SPT
should be ambitious, represent a material improvement in KPIs. compared to benchmark be consistent with issuer’s overall strategic S strategy; be determined on predefined timeline
Available data on climate change is not straightforward
TR: often estimated rather than reported by the company
PR: have similar shortcomings as ESG RATINGS
Primary sources for ESG scores
- external providers
- discussions with company
- corporate S reports
- Regulatory disclosures
EU Taxonomy
sets performance thresholds for economic activites- once in force, any investment or lending for a recognized activity counts as S.
To count as S, activities must make a substantive contribution to at least 1/6 env. objectives
EU taxonomy env. objectives
- climate change mitigation
- climate change adaptation
- S use of and protection of water and marine resources
- transition to a circular economy
- pollution prevention and control
- protection and restoration of biodiversity and ecosystems
