Green & Sustainable Finance, Markets & Instruments Flashcards
What is sustainable finance?
Refers to any kind of financial activity that takes sustainability into account
Covers different products and services
What is Green Finance?
Refers to sustainable finance focused on environment-related risks and opportunities (often, but not always climate change)
What is Climate Finance?
Refers exclusively to financial flows relating to climate change - historically associated with public > private sector funding
Net Zero Asset Owner Alliance - goal of aligning entire portfolios with net-zero by 2050
How has their membership grown? Members & AUM
12 to 37 members (2019 to 2021)
USD 2.4trillion to USD 5.4trillion
PRI:
Founding & 2021 Membership
Founding & 2021 AUM
Founding: 63 members - $6.5tn
2021: 3030+ members - $103tn
TCFD
Founding & 2021 members
Founding & 2021 AUM
Founding: 100 members - $25tn
2021: 1000 members - $140tn
Climate Action 100+
Founding & 2021 Members
Founding & 2021 AUM
Founding: 225 members - $25tn AUM
2021: 575 members - $54tn AUM
NZ AOA
Founding year
Founding & 2021 Members
Founding & 2021 AUM
Founded in 2019
Founding: 12 members - $2.4tn
2021: 37 members - $5.7tn
Who is GSIA?
How do they define sustainable finance?
Global Sustainable Investing Alliance (GSIA)
Very broad definition of sustainable finance - includes negative screening
GSIA’s quantification of sustainably invested funds globally:
Who has the greatest growth in their period?
2018: $30tn
Up 35% since 2016
Japan had the greatest growth in the period - sustainable assets tripled p.a on average
A large proportional of all professionally managed assets are now managed sustainably - GSIA quantified this regionally as:
50% Canada & Europe
25% in USA
What is the gold standard in tracking climate finance flows?
How is this done?
Climate Policy Initiative
Bi-annually - tracking both public and private sources
CPI suggests that climate finance has grown by…
75% 2012 to 2019
360bn to 600bn p.a.
Who did CPI identify as the single largest actor group in providing climate financing?
Approx p.a.
Development banks
$200b p.a.
What is the majority of climate financing linked to?
Renewable energy & low carbon transport
Domestic / non-domestic climate financing - what is the split?
CPI identified majority is domestic - 80% of financing within higher income OECD countries comes from domestic sources
Green or sustainability loans are typically agreements between …
A small number of banks and a borrowing company
Green or sustainability bonds are typically issued by ___ and traded where?
Issuance is underwritten by banks and traded on secondary markets
Sustainable finance products come in x3 broad varieties:
- Use of Proceeds
- Sustainability-linked instruments
- Sustainability as a criteria for inclusion
Define GREEN BONDS
Bonds whose proceeds are earmarked for environmental projects
Who were green bonds pioneered by - give an example
Multilateral development banks
I.e. 2007 EIB’s ‘climate awareness bond’ - $800mn at the time, now $270bn
What criteria are there for green bonds?
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
How is green bond issuance governed?
Largely self-defined and self-policies by the market under broad industry led principles
I.e Green Bonds Principles from ICMA
What is the ICMA?
International Capital Market Assoication
What has become established industry practice for green bonds
For bond issuers to seek a ‘second opinion’ on environmental credentials
What type of bonds make up the largest proportion of sustainable bond issuance in recent years
Green Bonds
What are the X4 (x5) core components of ICMA Green Bond Principles?
- Use of Proceeds
- Proceeds for Project Evaluation & Selection
- Management of Proceeds
- Reporting
(5. External Review) recommended
ICMA Principle: explain
Use of Proceeds
Utilisation for green projects should be outlined
Clear environmental benefits to be assessed
ICMA Principle: explain
Proceeds for Project Evaluation & Selection
Clearly communicate to investors the:
- environmental sustainability objectives
- process for determining how projects fit within the categories
- any eligibility criteria
ICMA Principle: explain
Management of Proceeds
Net proceeds should be credited to a sub-account and tracked in an appropriate manner
ICMA Principle; explain
Reporting
Reporting should include list of projects Green Bond has been allocated to; brief description ; expected impact ; amounts allocated
ICMA Principle - explain
Explain the types of external review
- second party opinion
- verification
- certification
- green bond scoring / ratings
Define SOCIAL BONDS
Bonds with earmarked proceeds for projects with social benefits
Define SUSTAINABILITY BONDS
What trends have been observed?
A combination of green and social bonds
Issuance has increased dramatically in 2020 - expected to grow further in 2021
Define SDG bonds
Bonds liked to UN Sustainable Development Goals
Define GREEN LOANS
Loans that have been made for environmental and climate-related projects
What has happened to global green loan underwriting from 2015 - 2019
USD 30bn to USD 90bn (X3)
Green Loans are highly concentrated in particular sector - provide examples
C.50% lent to renewables
C. 25% to power generation
C. 10% Utilities
C.5% Real Estate
How does the growth of green loans compare to sustainability linked loans?
Sustainability linked loans volume exceeded green loans in 2019, despite a later start
Who was an early adopter of green loans?
As part of what policy?
China -
Government’s 2007 Green Credit Policy - required banks to offer green credit for environmental protection
What has happened to China’s proportion of green loans between 2013 to 2019?
Increased from 8.8% to 10.8% (c.$2tn)
Majority to clean transport (45%)
How do China’s green loan perform compared to conventional loans?
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
Define SUSTAINABILITY LINKED BONDS
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
Define SUSTAINABILITY LINKED LOANS
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
What was the volume of SLBs and SLLs like in 2019
More than green loans = >$90bn
What set the guideline for SLLs? When was this launched?
Sustainability Linked Loan Principles - 2019
What set the guideline for SLBs? When was this launched?
Sustainability Linked Bond Principles - 2020
Who are the Sustainability Linked Bond Principles issued by?
What else did they issue?
ICMA
Green Bond Principles
Who were the Sustainability Linked Loan Principles issued by?
Umbrella organisation of -
Loan Market Association (LMA)
Loan Syndication and Trading Association (LSTA)
Asia Pacific Loan Market Association (APLMA)
Chanel example of SLBs
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
Volution SLL example
GBP 150m (2020)
Loan facility linked to % of sales revenue from low carbon products & % of plastic processed in own factories from recycled sources
SLL Principles (2019) - name the X4 components
- Relationship to Borrower’s Overall STRATEGY
- TARGET Setting
- REPORTING
- REVIEW
True or false - use of proceeds in relation to a SLL is not a determinant in its categorisation
True - SLLs can be used for general corporate purposes (unlike a green loan)
In a SLL, how is a borrower’s sustainability performance measured?
Using sustainability performance targets (SPTs)
SLB Principles (2020) - ICMA
Name the x5 core components
- Selection of KPIs
- Calibration of SPTs
- Bond Characteristics
- Reporting
- Verification
What does the following description define?
‘Issuers are committing to future improvements in sustainability outcomes within a predefined timeline…’
SLBs
SLB Principles: Explain
Selection of KPIs…these should be:
- Relevant, core to overall business
- Measurable
- Externally verifiable
- Benchmark-able
SLB Principles: Explain
Calibration of SPTs…these should be:
- a material improvement in respective KPIs beyond BAU
- compared to a benchmark
- consistent with overall ESG strategy
- pre-defined timeline
Green or ESG indices are often conducted by whom?
Fund manager or index provider
The ETF market shows sustainable fund’s proliferation - largest sustainability equity ETF in terms of assets is…
What do they do to be sustainable?
BlackRock’s iShares Division - c.$7th AUM
Completely excludes tobacco, alcohol, gambling etc. and screens companies in oil / coal
The largest x10 sustainable ETFs come in at around ____ by in assets.
For context, the largest existing ETF is how many times larger?
Top 10 sustainable ETFs = $40bn AUM
X9 larger
What is the objective of ESG ratings?
What is a drawback?
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
Quantify the lack of standardisation in ESG ratings
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
What does ‘full ESG integration’ mean?
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.
‘Divestment’ is promoted primarily by whom?
Activists > investors
In 2021 Shareholder Engagement largely focused on demanding…
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
What is the success of shareholder engagement?
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
What is the ultimate penalty that shareholders can threaten in their engagement?
What does this require
Divestment -
Requires huge scale and market power
What did Legal & General launch with GBP 1trillion AUM? & when?
2016 - Climate Impact Pledge
Program to target engagement with 80 firms with the aim to accelerate their transition to net-zero
How did Legal & General’s Climate Impact Pledge operate?
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
What happened to L&G’s CIP in 2020?
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
What did the ECB recognise in relation to green finance in 2020?
SLBs are acceptable as collateral
In the EU, a directive on disclosure requires large firms to disclose ESG related matters.
This expanded when and now includes what?
Expanded in 2021 to include all firms with 500+ employees doing business in the EU
TCFD requirements in the UK
From 2022 all listed companies need to report in line with TCFD
GHG and diversity reporting mandatory in the UK since
2006
In China what is the status of climate related disclosures?
All listed firms need to disclose ESG risks
How are disclosures and exchanges related?
Exchanges are an important gatekeeper - the only venues where companies can be publicly listed
Some require annual sustainability report prior to IPO
Difference between China’s green bonds and OECD’s green bonds
China allows ‘clean fossil fuels’ i.e. clean coal to be financed via green bonds - unlike OECD
*although this has changed since 2020
In the EU Taxonomy, economic activities must make a substantive contribution to at least one of six environmental objectives. Outline these x6 objectives
- Climate Mitigation
- Climate Adaptation
- Sustainable Use & Protection of Water/Marine Resources
- Protection of Biodiversity
- Pollution Prevention & Control
- Circular economy
Provide examples for EU Taxonomy technical criteria -
- Cement Manufacture
- Passenger Rail Transport
- 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
