Green and Sustainable Finance: Markets and Instruments

Question 1

True or false

Green finance refers to the financial activities that are focused on funding specifically green projects like RE

Answer 1

False

Their main function is to focus on environment-related risks and opportunities. It doesn’t always have to include climate change but it often does. This is compared to climate finance which looks specifically at financial flows that relate to climate change, mitigation or adaptation

Question 2

What are green bonds?

Answer 2

When proceeds are earmarked for environmental projects

Ways that they differ from normal bonds
* normal bonds act as a general-purpose borrowings
* Green bonds are separately labelled and proceeds are ring-fenced
* The planned use of the green bond is also reported to prospective bondholders beforehand and current bondholders once implemented

Question 3

What is an issue with green bonds?

If I say it then it must be true

Answer 3

Green bond issuances are largely self-defined and self-policed by the market under industry-led principles like the Green Bond Principles

Meaning that there isn’t any specific definition of a “green bond”

Question 4

What has become an industry practice for green bond issuers?
1. Disclosure of the portfolios invested in
2. Management of the proceeds
3. The use of proceeds
4. Second opinion on the environmental credentials

Answer 4

(4) Second opinion on the environmental credentials

Question 5

What are green loans?

Answer 5

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

Question 6

True or false

China used its green loans to require banks to offer green credit for environmental protection, emisison reduction, and energy conservation projects

Answer 6

True

Restricts loans on high-polluting and emitting industries to reduce environmental harm and to improve financial stability by reducing environmental harm or exposure to climate-related financial risks

Question 7

How do sustainability linked bonds differ from green bonds?

Answer 7

The interest rate (ie: coupon) that is paid by the issuer is linked to the issuer’s achievement of sustainability targets and is not just cordoned off for green projects

use of KPIs as their targets

Question 8

Who are sustainable and green funds typically targeted towards?
1. Central banks
2. Asset managers
3. Loan issuers
4. Institutional and retail investors

Answer 8

(4) Institutional and retail investors

Question 9

How can green or ESG indices solve issues surrounding sustainable and green funds?

Answer 9

Helps investors to assess the credibility of the loan

Esp. considering the huge number of funds that call themselves ‘sustaianble’

Some places will even have their own ‘green labels’ like London Stock Exchange’s Green Economy Label

Question 10

What is the first step of integrating climate or ESG issues into investment and lending decisions?

Answer 10

A numerical gauge for ESG risks and exposures

Mostly used by investors and lenders to gauge the performance of investee or debtor companies

Question 11

Which of these is NOT an issue that ESG scores experience?
1. Black box calculations and methodology
2. Little standardisation between ratings
3. May result in more greenwashing due to non-standard definitions with more loopholes
4. Lack of cross-comparability between ratings
5. Lack of available data on emisisons from companies

Answer 11

(3) May result in more greenwashing due to non-standard definitions with more loopholes

Question 12

What is a current issue with iintegrating ESG and climate considerations into a businesses’ operations?

Are you ready for it?

Answer 12

There is a varying degree of readiness within financial firms

Eg: some may have a separate ESG/ sustainability section that is separate from the main investment/ lending functions and only guides these functions indirectly
Eg2: Some ESG/ sustainability sections are still separated out BUT more closely tied to the portfolio managers and investment teams, where portfolio mangers need to complete some sort of ESG assessment or consult in-house experts

Question 13

Give 4 ways

What ways can investors and lenders collect ESG data on investee and debtor companies?

Answer 13

1) External PRoviders
2) Discussions with the company
3) Corporate Sustainability Reports
4) Regulatory Disclosures

Question 14

True or false

ESG integration within a company tends to happen in isolation, whereby ESG issues are merely integrated into the internal processes and operations.

Answer 14

False

ESG integration is paired with engagement with companies and decisions about company over- or under-weights in loan books and investment portfolios

Question 15

True or false

Although divestment is typically favoured by activists, certain sectors have been restricted or excluded from climate funds such as tar sands, offshore oil and gas, hydraulic fracturing and Arctic oil projects

Answer 15

True

Question 16

Give 4 examples

In what ways can ESG be integrated in the investment and operational chain?

For the other two, think about what FIs do and how risks can be mitigated

Answer 16

1. Internal research
2. Investing and lending decisions
3. Portfolio analysis
4. Risk management and internal audit

Question 17

Which of these reasons is NOT why practicing engagement with shareholders is so important for ESG integration in financial firms?
1. Increased credibility with clients
2. Mitigate financial risks from ESG-related issues
3. Increased knowledge of the shareholders’ expectations
4. Pressure from regulators

Answer 17

(3) Increased knowledge of the shareholders’ expectations

The scale of engagement activities can pressure large, emissions -intensive corporations to become more sustainable, therefore, having macroeconomic effects

Question 18

How did shareholder engagement initially affect companies?

Answer 18

To push companies for better disclosure of ESG performance metrics

Now, investors use the shareholder resolutions and public advocacy to call for increased and improved calculation and disclosure on ESG factors

A lot of the pressure also came from regulators through the TCFD

Question 19

What has been a successful investor coalition that has been able to exert more pressure?

Emphasis on investor

Answer 19

Climate Action 100+

It has 700 members in it, representing USD 68 trillion in assets under management. Signatories of Climate Action 100+ are able to exert much more pressure on management than individual investors because they make up a substantial proportion of the shareholders of any publicly listed company

Question 20

True or false

There has not been much evidence indicating that shareholder engagement can achieve much results

Answer 20

False

In fact, shareholder proposals have been liked to increases in ESG ratings of the firm and have shown success rates from 18%-60%

Question 21

Give 2 reasons

Why doesn’t divestment work in all cases?

Answer 21

1. Requires market power and flexibility :. can only be made by larger asset managers or hedge funds
2. Passively managed funds, like those that follow an index, don’t get the decision to divest on their own accords

Passively managed funds will change only if the tracker index has changed or the underlying index composition has changed

Question 22

Give 3 examples

How have common law jurisdictions, like the UK, implemented regulatory involvement?

Greenwashing

Answer 22

• sustainable investment labels
• ongoing sustainability-related performance information
• general anti-greenwashing rule for investors

:. It is up to the investor to substantiate sustianability claims rather than regulators try and define every type of sustainability claim

Question 23

Give 3 examples

How have civil law jurisdictions implemented regulatory involvement

Answer 23

• specifying green bond definitions
• limits of sustainable economic activities
• sustainable fund marketing parameters

Question 24

Give one reason

Why has the sustainability-linked bonds market grown since 2020?

European Central Bank

Answer 24

ECB deemed it acceptable as collateral

Remember the 5Cs of Credit rating (character, capital, conditions, capacity, collateral)

Question 25

True or false

Many financial products have been standardised by the bottom-up. However, this trend is not as prominently applied to social and sustainability bonds and loans.

Answer 25

False

They have grown in the same way. In general, green bonds work the same across all countries, barring China, due to domestic regulatory pressure

Question 26

Which jurisdiction has gotten the furthest in creating a regulatory green bond standard?
1. USA
2. Japan
3. EU
4. China

Answer 26

(3) EU

Question 27

What has the EU issued to help disclosure requirements?

Answer 27

Issued a Directive on disclosure of non-financial information that requires large firms and firms of public interest to disclose ESG-related matters

Has now been expanded so that firms with >500 emplyees and trades with the EU must disclose their ESG-related matters

Question 28

What has the UK done to help disclosure requirements, as of 2022?
1. Required to report on the GHG emissions and diversity
2. All listed companies and limited liability partnerships need to report on climate risk to align with TCFD recommendations
3. Mandated all listed companies to disclose their ESG risks
4. Required all listed companies >250 to disclose their Scope 3 emissions

Answer 28

(2) All listed companies and limited liability parternships need to report on climate risk to align with TCFD recommendations

Question 29

Why are exchanges important gatekeepers in disclosure requirements?

Answer 29

Because they are the only venues where companeis can be publicly listed

Exchanges have increasingly become more important in disclosure requirements

Eg: Shanghai and Shenzhen Stock Exchange requiring ESG disclsoure from firms that are listed on either one of them

Question 30

True or false

An increasing amount of regulatory activity regarding sustainable finance has involved financial products and disclosure efforts.

Answer 30

False

There is a growing amount of regulatory activity regarding the underlying economic activitiy being financed. There has typically been some divergence between jurisdictions but recently, has been slowly harmonising definitions to create a revised standard that aligns with other countries

Question 31

What would you need to do to be deemed a ‘green’ activity under the EU Taxonomy’s technical screening criteria?
1. climate change mitigation, climate change adaptation, anti-consumerism, recycling, pollution control, protection and restoration of biodiversity
2. Climate change mitigation, climate change adaptation, pollution prevention, resource management, energy reductions
3. Climate change mitigation, climate change adaptation, pollution control, energy maangement, resource control, biodiversity preservation
4. climate change mitigation, climate change adaptation, sustianable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems

Answer 31

(4) Climate change mitigation, climate change adaptation, sustianable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems

Must explicitly not cause harm to any of the other 5 objectives and meet a series of minimum safeguards

Question 32

True or false

The rapid development of different cross-border investment flows has meant that there are too many confusing products in the market and the harmonisation of definitions is to outline what are considered green products

Answer 32

False

Although the magnitude of global cross-border investment flows have increased, the harmonisation of definitions on what is a sustainable investment product is occuring to foster better comparatability across borders and to reduce confusion in the market

Question 33

What did the EU and China announce plans for regarding taxonomies?

harmonise

Answer 33

Joint technical work on harmonising taxonomies to develop a jointly recognised classification system

updated version published in June 2022

Question 34

Which of these are NOT part of the growing regulatory trend?
1. More regulatory involvement
2. Cross-border harmonisation of definitions
3. Integrating ESG into the fabric of operations in financial firms
4. None of the above

Answer 34

(5) None of the above