Sovereigns and sustainable bonds: challenges and new options Flashcards
What are GSS bonds, and why have they gained significance in the bond market?
GSS bonds refer to green, social, and sustainable bonds, which have become increasingly significant in the bond market due to their focus on environmentally and socially responsible investment strategies.
What factors contributed to the significant increase in monthly issuance of GSS bonds in the 2020-2021 period?
The increase in issuance was primarily caused by governments’ COVID-19 policies and new climate change plans, leading to a surge in monthly issuance from around $30 billion to $80 billion.
What are some characteristics of sovereign GSS bonds compared to corporate entities?
Sovereign GSS bonds typically have longer maturities and constitute a smaller portion of bonds issued by sovereign entities compared to corporate entities.
What are the main challenges associated with government GSS bonds, and how are they being addressed?
Challenges include fungibility of bond revenues and the need for impact measurement and verification. Governments address these challenges by increasing spending, relying on specialized reviewers, and implementing reporting mechanisms.
What are Sustainability-linked bonds (SLBs), and how do they differ from traditional GSS bonds?
SLBs are bonds with predefined green goals, where failure to achieve the goals results in a penalty in the form of a higher interest rate. Unlike traditional GSS bonds, the use of funds from SLBs is not restricted until key performance indicators (KPIs) are achieved.
What is a potential issue with the effectiveness of SLBs, and how might it be addressed?
The cost of achieving KPIs may be higher than the penalty for non-compliance, leading to a lack of incentive for entities to achieve the goals. This issue could be addressed by setting higher penalties and increasing social perception.
