Green bond vs. ESG Investor Concepts Flashcards
To better understand the fundamental difference between investors selecting Green bonds directly rather than using an ESG framework.
What is the primary difference between an ESG and a Green bond investor?
Green bond investors focus on the bond issue, and how the bond’s use of proceeds are spent; while the ESG investor focuses on the issuer, the entity issuing the bond.
Why is the difference between an ESG investor and a Green bond investor significant?
According to the Green Bond Principles, firms do not need to be Green to issue Green bonds; but an ESG investor would seldom buy a security from a firm with a poor ESG score.
Do ESG investors buy Green bonds?
Asset managers/owners that choose not to create green bond funds, but instead to undertake ESG integration, are still buying Green bonds. They are simply placing these in their non-Green bond funds, in order to achieve one element of ESG integration.
What is the primary advantage of purchasing a Green bond rather than simply integrating ESG factors when choosing which bonds in which to invest?
The key advantage of a Green bond is that the bond investor knows the bond’s proceeds are being spent on green projects; and the eligible green projects or project types to be funded. If one simply buys bonds from firms that score well against ESG criteria, this advantage is lost.
Give another reason why an investor might be at a disadvantage using ESG factors rather than selecting specific Green bond offerings?
If an investor only buy bonds from firms with a high ESG score, they may choose not to buy Green bonds from industrial firms, or ‘hard to abate’ sectors. These latter sectors, however, may be the sectors where green investments are most needed and beneficial to risk mitigation.
Why is the difference between choosing a specific Green bond issuance versus selecting bonds using ESG factors of fundamental importance?
The market currently lacks a clear definition of what constitutes a good ESG score. So when an investor chooses to use an ESG approach rather than purchasing a Green bond, they give up something tangible and specific– the knowledge that specific green projects are being funded, for something fairly abstract – a view that an issuer takes ESG risks seriously.
