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GARP SCR > Green & Sustainable Finance, Markets & Instruments > Flashcards

Green & Sustainable Finance, Markets & Instruments Flashcards

1
Q

What is sustainable finance?

A

Refers to any kind of financial activity that takes sustainability into account

Covers different products and services

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2
Q

What is Green Finance?

A

Refers to sustainable finance focused on environment-related risks and opportunities (often, but not always climate change)

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3
Q

What is Climate Finance?

A

Refers exclusively to financial flows relating to climate change - historically associated with public > private sector funding

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4
Q

Net Zero Asset Owner Alliance - goal of aligning entire portfolios with net-zero by 2050

How has their membership grown? Members & AUM

A

12 to 37 members (2019 to 2021)

USD 2.4trillion to USD 5.4trillion

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5
Q

PRI:

Founding & 2021 Membership

Founding & 2021 AUM

A

Founding: 63 members - $6.5tn

2021: 3030+ members - $103tn

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6
Q

TCFD

Founding & 2021 members

Founding & 2021 AUM

A

Founding: 100 members - $25tn

2021: 1000 members - $140tn

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7
Q

Climate Action 100+

Founding & 2021 Members

Founding & 2021 AUM

A

Founding: 225 members - $25tn AUM

2021: 575 members - $54tn AUM

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8
Q

NZ AOA

Founding year

Founding & 2021 Members

Founding & 2021 AUM

A

Founded in 2019

Founding: 12 members - $2.4tn

2021: 37 members - $5.7tn

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9
Q

Who is GSIA?

How do they define sustainable finance?

A

Global Sustainable Investing Alliance (GSIA)

Very broad definition of sustainable finance - includes negative screening

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10
Q

GSIA’s quantification of sustainably invested funds globally:

Who has the greatest growth in their period?

A

2018: $30tn

Up 35% since 2016

Japan had the greatest growth in the period - sustainable assets tripled p.a on average

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11
Q

A large proportional of all professionally managed assets are now managed sustainably - GSIA quantified this regionally as:

A

50% Canada & Europe

25% in USA

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12
Q

What is the gold standard in tracking climate finance flows?

How is this done?

A

Climate Policy Initiative

Bi-annually - tracking both public and private sources

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13
Q

CPI suggests that climate finance has grown by…

A

75% 2012 to 2019

360bn to 600bn p.a.

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14
Q

Who did CPI identify as the single largest actor group in providing climate financing?

Approx p.a.

A

Development banks

$200b p.a.

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15
Q

What is the majority of climate financing linked to?

A

Renewable energy & low carbon transport

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16
Q

Domestic / non-domestic climate financing - what is the split?

A

CPI identified majority is domestic - 80% of financing within higher income OECD countries comes from domestic sources

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17
Q

Green or sustainability loans are typically agreements between …

A

A small number of banks and a borrowing company

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18
Q

Green or sustainability bonds are typically issued by ___ and traded where?

A

Issuance is underwritten by banks and traded on secondary markets

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19
Q

Sustainable finance products come in x3 broad varieties:

A
  1. Use of Proceeds
  2. Sustainability-linked instruments
  3. Sustainability as a criteria for inclusion
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20
Q

Define GREEN BONDS

A

Bonds whose proceeds are earmarked for environmental projects

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21
Q

Who were green bonds pioneered by - give an example

A

Multilateral development banks

I.e. 2007 EIB’s ‘climate awareness bond’ - $800mn at the time, now $270bn

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22
Q

What criteria are there for green bonds?

A

Separately labelled, proceeds are ring fenced, use of proceeds is reported to prospective bond holders ex ante and to current bond holders once projects implemented

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23
Q

How is green bond issuance governed?

A

Largely self-defined and self-policies by the market under broad industry led principles

I.e Green Bonds Principles from ICMA

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24
Q

What is the ICMA?

A

International Capital Market Assoication

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25
Q

What has become established industry practice for green bonds

A

For bond issuers to seek a ‘second opinion’ on environmental credentials

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26
Q

What type of bonds make up the largest proportion of sustainable bond issuance in recent years

A

Green Bonds

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27
Q

What are the X4 (x5) core components of ICMA Green Bond Principles?

A
  1. Use of Proceeds
  2. Proceeds for Project Evaluation & Selection
  3. Management of Proceeds
  4. Reporting
    (5. External Review) recommended
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28
Q

ICMA Principle: explain

Use of Proceeds

A

Utilisation for green projects should be outlined

Clear environmental benefits to be assessed

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29
Q

ICMA Principle: explain

Proceeds for Project Evaluation & Selection

A

Clearly communicate to investors the:

  • environmental sustainability objectives
  • process for determining how projects fit within the categories
  • any eligibility criteria
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30
Q

ICMA Principle: explain

Management of Proceeds

A

Net proceeds should be credited to a sub-account and tracked in an appropriate manner

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31
Q

ICMA Principle; explain

Reporting

A

Reporting should include list of projects Green Bond has been allocated to; brief description ; expected impact ; amounts allocated

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32
Q

ICMA Principle - explain

Explain the types of external review

A
  • second party opinion
  • verification
  • certification
  • green bond scoring / ratings
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33
Q

Define SOCIAL BONDS

A

Bonds with earmarked proceeds for projects with social benefits

34
Q

Define SUSTAINABILITY BONDS

What trends have been observed?

A

A combination of green and social bonds

Issuance has increased dramatically in 2020 - expected to grow further in 2021

35
Q

Define SDG bonds

A

Bonds liked to UN Sustainable Development Goals

36
Q

Define GREEN LOANS

A

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

37
Q

What has happened to global green loan underwriting from 2015 - 2019

A

USD 30bn to USD 90bn (X3)

38
Q

Green Loans are highly concentrated in particular sector - provide examples

A

C.50% lent to renewables

C. 25% to power generation

C. 10% Utilities

C.5% Real Estate

39
Q

How does the growth of green loans compare to sustainability linked loans?

A

Sustainability linked loans volume exceeded green loans in 2019, despite a later start

40
Q

Who was an early adopter of green loans?

As part of what policy?

A

China -

Government’s 2007 Green Credit Policy - required banks to offer green credit for environmental protection

41
Q

What has happened to China’s proportion of green loans between 2013 to 2019?

A

Increased from 8.8% to 10.8% (c.$2tn)

Majority to clean transport (45%)

42
Q

How do China’s green loan perform compared to conventional loans?

A

Perform better - non-performing green loans c.25% of the rate of NPL non-green loans

Varies between large state owned banks and regional - green loans safer in larger banks

43
Q

Define SUSTAINABILITY LINKED BONDS

A

Linked financing to sustainability targets as an incentive, rather than ring-fencing certain funds for use in green or sustainable projects.

Coupon paid by issuer linked to issuer firm’s achievement of pre-agreed sustainability targets

44
Q

Define SUSTAINABILITY LINKED LOANS

A

Linked financing to sustainability targets as an incentive, rather than ring-fencing certain funds for use in green or sustainable projects.

Interest rate on the loan is linked to achievement of certain sustainability benchmarks

45
Q

What was the volume of SLBs and SLLs like in 2019

A

More than green loans = >$90bn

46
Q

What set the guideline for SLLs? When was this launched?

A

Sustainability Linked Loan Principles - 2019

47
Q

What set the guideline for SLBs? When was this launched?

A

Sustainability Linked Bond Principles - 2020

48
Q

Who are the Sustainability Linked Bond Principles issued by?

What else did they issue?

A

ICMA

Green Bond Principles

49
Q

Who were the Sustainability Linked Loan Principles issued by?

A

Umbrella organisation of -

Loan Market Association (LMA)

Loan Syndication and Trading Association (LSTA)

Asia Pacific Loan Market Association (APLMA)

50
Q

Chanel example of SLBs

A

EUR 600m (x2 300m) 2020

First tranche of 300m - linked to cutting emissions 50% by 2030
= coupon of bond goes up 75% if not met

2nd tranche of 300m - linked to transitioning to 100% renewable energy by 2025
= coupon doubles if not met

51
Q

Volution SLL example

A

GBP 150m (2020)

Loan facility linked to % of sales revenue from low carbon products & % of plastic processed in own factories from recycled sources

52
Q

SLL Principles (2019) - name the X4 components

A
  1. Relationship to Borrower’s Overall STRATEGY
  2. TARGET Setting
  3. REPORTING
  4. REVIEW
53
Q

True or false - use of proceeds in relation to a SLL is not a determinant in its categorisation

A

True - SLLs can be used for general corporate purposes (unlike a green loan)

54
Q

In a SLL, how is a borrower’s sustainability performance measured?

A

Using sustainability performance targets (SPTs)

55
Q

SLB Principles (2020) - ICMA

Name the x5 core components

A
  1. Selection of KPIs
  2. Calibration of SPTs
  3. Bond Characteristics
  4. Reporting
  5. Verification
56
Q

What does the following description define?

‘Issuers are committing to future improvements in sustainability outcomes within a predefined timeline…’

A

SLBs

57
Q

SLB Principles: Explain

Selection of KPIs…these should be:

A
  • Relevant, core to overall business
  • Measurable
  • Externally verifiable
  • Benchmark-able
58
Q

SLB Principles: Explain

Calibration of SPTs…these should be:

A
  • a material improvement in respective KPIs beyond BAU
  • compared to a benchmark
  • consistent with overall ESG strategy
  • pre-defined timeline
59
Q

Green or ESG indices are often conducted by whom?

A

Fund manager or index provider

60
Q

The ETF market shows sustainable fund’s proliferation - largest sustainability equity ETF in terms of assets is…

What do they do to be sustainable?

A

BlackRock’s iShares Division - c.$7th AUM

Completely excludes tobacco, alcohol, gambling etc. and screens companies in oil / coal

61
Q

The largest x10 sustainable ETFs come in at around ____ by in assets.

For context, the largest existing ETF is how many times larger?

A

Top 10 sustainable ETFs = $40bn AUM

X9 larger

62
Q

What is the objective of ESG ratings?

What is a drawback?

A

Intended to express a holistic assessment of a company into one, easily understood and cross-comparable score or rating

Little standardisation across the scoring - methods are quite proprietary, difficult to compare

63
Q

Quantify the lack of standardisation in ESG ratings

A

ESG ratings providers only correlated by c.0.6% - much less than standard credit ratings

Number of ratings has grown x5 in the last ten years (now 600+)

Emissions are often estimated - therefore not cross comparable as based on different assumptions

64
Q

What does ‘full ESG integration’ mean?

A

Where every analyst, portfolio manager and decision maker is trained in ESG issues and applies ESG to their job function - separate team is not required.

65
Q

‘Divestment’ is promoted primarily by whom?

A

Activists > investors

66
Q

In 2021 Shareholder Engagement largely focused on demanding…

A

That companies align with certain targets (i.e. PCA) - companies which do not are named and shamed and shareholders pass resolutions forcing management to act

67
Q

What is the success of shareholder engagement?

A

Investors find the most success as part of large coalitions (i.e. Climate Action 100+(

Companies comply with engagement requests c.20% to 60% of the time

68
Q

What is the ultimate penalty that shareholders can threaten in their engagement?

What does this require

A

Divestment -

Requires huge scale and market power

69
Q

What did Legal & General launch with GBP 1trillion AUM? & when?

A

2016 - Climate Impact Pledge

Program to target engagement with 80 firms with the aim to accelerate their transition to net-zero

70
Q

How did Legal & General’s Climate Impact Pledge operate?

A

Firms given a Climate Impact Pledge (CIP) score - based on governance / targets etc.

CIP score published and firms ‘named and shamed’

L&G would vote against the management of lower scoring firms and in scope cases, divest

71
Q

What happened to L&G’s CIP in 2020?

A

Pledge was renewed and expanded - increased number of sectors and companies
Now 500 firms that L&G will address via letter, targeting 50 ‘pivotal’ companies for more engagement

72
Q

What did the ECB recognise in relation to green finance in 2020?

A

SLBs are acceptable as collateral

73
Q

In the EU, a directive on disclosure requires large firms to disclose ESG related matters.

This expanded when and now includes what?

A

Expanded in 2021 to include all firms with 500+ employees doing business in the EU

74
Q

TCFD requirements in the UK

A

From 2022 all listed companies need to report in line with TCFD

75
Q

GHG and diversity reporting mandatory in the UK since

A

2006

76
Q

In China what is the status of climate related disclosures?

A

All listed firms need to disclose ESG risks

77
Q

How are disclosures and exchanges related?

A

Exchanges are an important gatekeeper - the only venues where companies can be publicly listed

Some require annual sustainability report prior to IPO

78
Q

Difference between China’s green bonds and OECD’s green bonds

A

China allows ‘clean fossil fuels’ i.e. clean coal to be financed via green bonds - unlike OECD

*although this has changed since 2020

79
Q

In the EU Taxonomy, economic activities must make a substantive contribution to at least one of six environmental objectives. Outline these x6 objectives

A
  1. Climate Mitigation
  2. Climate Adaptation
  3. Sustainable Use & Protection of Water/Marine Resources
  4. Protection of Biodiversity
  5. Pollution Prevention & Control
  6. Circular economy
80
Q

Provide examples for EU Taxonomy technical criteria -

  • Cement Manufacture
  • Passenger Rail Transport
A
  • Cement - minimise emissions in process i.e. cement clinker required
  • Passenger Rail Transport - demonstrate reduction in emissions through fleet efficiency improvements, increasing low/net-zero fleet

GARP SCR (7 decks)

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