Macro Green Bond Topics Flashcards
To communicate general, high-level information about Green bonds/securities.
What is “greenium”?
According to Bloomberg, “Industry thinking suggests that there is a “greenium” premium determinable by comparing Green bonds with traditional debt. The higher costs associated with this debt issuance and consistent higher demand from investors are believed to make green bonds stronger than many others.”
What are some potential reasons for higher investor demand for Green securities resulting in a “greenium”?
1) Green securities may address some fiduciary responsibilities of institutional investors. (Risk Mitigation)
2) Green securities by design address some portfolio-level risks for investors. (Risk Mitigation)
3) Green securities “usage of proceeds” allows investors with “values-based” investment themes to directly address their investment needs. (Thematic)
Is “greenium” present across all Green security issuance?
Several studies have shown that while “greenium” is often present in a variety of Green securities, it is not found in all Green securities.
What is “greenwashing”?
According to the Center for Media and Democracy, “Greenwashing is the unjustified appropriation of environmental virtue by a company, an industry, a government, a politician or even a non-government organization to create a pro-environmental image, sell a product or a policy, or to try and rehabilitate their standing with the public and decision makers after being embroiled in controversy.”
Why is “greenwashing” an issue for Green securities issuers and Green investment strategies?
“Greenwashing” dilutes the usage of proceeds/assets and negatively affects investor attitudes towards Green investing.
What are some reasons companies choose not to issue Green bonds?
1) Need for internal usage of proceeds framework
2) Need for external review of proposed usage of proceeds
3) Ongoing reporting requirements until all proceeds are allocated to projects and 3rd party monitoring
4) Additional costs associated with compliance
What are 3 key factors for ease of Green securities issuance?
According to David Chen of Equilibrium Capital, “Quality, scale, and repeatability of projects…” are key factors for success in attracting investors to Green issuance.
Is it possible for historically and/or currently climate-unfriendly companies to issue Green bonds?
Any company or entity can issue Green bonds, as long as the usage of proceeds meets the criteria necessary to qualify the project being financed as compliant with industry norms. It will, however, likely be difficult for the company issuing the Green securities to attract investors if their industry is historically or currently climate-unfriendly.
What are “transition” bonds?
AXA has defined “transition bonds” in the following way: “Transition Bonds are any type of bond instrument where the proceeds will be exclusively used to fully, or partly finance, or refinance new and/or existing eligible transition projects, and which are aligned with the Transition Bond Guidelines…Transition bond issuers should clearly communicate what climate transition means in the context of their current business model and their future strategic direction. Senior management and board directors should make a commitment to align their business with meeting the COP21 Paris Agreement goals…The issuer’s transition strategies should be intentional, material to the business and measurable. The Transition Bond must fit into the broader transition strategy. This should be defined by quantified short and long-term environmental objectives. Transition Bonds should be a tool to principally finance a share of the issuer’s spending necessary to achieve targets.”
Why are “transition” bonds a potentially vital financing component in achieving climate-mitigation and adaptation goals?
Most businesses in the world today either lack the environmental credentials or have sufficiently “green” projects to meet the rigorous standards for “green” securities issuance. They may, however, genuinely wish to transition to a more environmentally-friendly or climate-friendly business model (especially in traditionally heavy industry or energy production), and “transition” bonds offer a means of attracting investors to these important projects that they might otherwise avoid.
