Unit 7: Green & Sustainable Bonds

Question 1

What are the two types of debt product categories?

Answer 1

1) Organisation-guaranteed bonds: raise money for general purposes and are backed by the issuing organisation as a whole.

2) Asset-backed securities: the interest payments are tied directly to specified assets such as a solar energy project, for instance. These assets are often placed in a corporate structure called a ‘special purpose entity/vehicle’, set up specifically in order to hold the assets.

Question 2

What is the largest single asset class in the financial system?

Answer 2

Bonds

Question 3

What are the key features of bonds?

Answer 3

1) Issuer Risk: How likely is it that the borrower (e.g. a company or a government) will default?

2) Currency Risk: Bonds can be issued in many currencies, and fluctuations in exchange rates may affect their existing and future value.

3) Coupon: The rate of interest paid on the face value of the bond (usually paid annually, semi-annually, or quarterly); the higher the risk of default, the higher the coupon needed to compensate investors for taking on that risk.

4) Maturity: How long is it before the investor gets their money back?

5) Yield: The investment return on a bond, calculated by dividing the coupon by the current market price. As bond prices increase, the yield falls.

Question 4

What is a Green Bond?

Answer 4

Green bonds are bonds where the proceeds raised are allocated to environmental projects or activities.

Question 5

What are the four key indicating factors of a Green Bond?

Answer 5

1. Use of proceeds: used to finance projects with environmental positive outcomes
2. External review: issuers evaluate the intended environmental sustainability objectives of projects
3. Disclosure and management of proceeds: allocation of funds should be independently audited and disclosed
4. Reporting: issuers should report on the environmental impacts achieved – both positive and negative

Question 6

What is the Green Use of Proceeds Bond?

Answer 6

Capital raised is used for specific climate change mitigation and/or adaptation projects, with the bonds backed by the issuer’s entire balance sheet.

It also encourages ‘pari passu’ pricing of green and conventional ‘vanilla’ bonds from issuers, meaning there is no premium charged for the former.

Question 7

What is a Green Project Bond?

Answer 7

Is not backed by an issuer’s whole balance sheet, but by the green project’s or projects’ assets and balance sheet(s) only. Generally, there is no recourse to the issuer.

This increases the risk profile of the bond.

Question 8

What is a Green Revenue Bond?

Answer 8

Is backed by pledged revenue streams from a project or projects, usually with no recourse to the issuer.

Question 9

What is a Green Convertible Bond?

Answer 9

A type of bond where debt can be converted into the issuer’s equity shares, usually at set times determined by the issuer in advance.

Question 10

What is a Green Sukuk?

Answer 10

Sukuk are a Sharia-compliant form of financial certificate, sharing many features with asset-backed bonds.

Like a green bond, green sukuk refers to a security where the proceeds are used to support projects with environmentally-focused outcomes.

Question 11

What are the advantages of Green Bonds?

Answer 11

1. Access to a more diversified investor base, including institutions and funds with environmental sustainability mandates
2. Provide reputational benefits to the issuer
3. Demand by investors for green bonds can be higher than for traditional alternatives
4. Evidence of a ‘greenium’, i.e. a premium for a green bond compared with its traditional ‘vanilla’ equivalents.

Question 12

What are the disadvantages of Green Bonds?

Answer 12

1. No financial benefit to an issuer of issuing green bonds, compared with traditional alternatives
2. Not necessarily additive
3. By focusing investment on generally new, ‘green’ technology and infrastructure, they do not support organisations’ overall transitions to low-carbon business models.
4. The risk of greenwashing

Question 13

What is GBPs?

Answer 13

International Capital Markets Association (ICMA) developed the Green Bond Principles (GBPs), first published in 2014, revised in 2018 and the latest version released in June 2021. Although voluntary process guidelines, the GBPs have become widely adopted by issuers, investors and other market participants.

Question 14

What is the aim of the GBPs?

Answer 14

1. Provide issuers with guidance on the key components involved in launching a credible Green Bond
2. Aid investors by ensuring availability of information necessary to evaluate the environmental impact of Green Bond investments
3. Assist underwriters by moving the market towards standard disclosures that will facilitate transactions.

Question 15

What are the two key recommendations for heightened transparency in Green Bonds?

Answer 15

1. Green Bond Frameworks
2. External Reviews

Question 16

What are some examples of green and sustainable bonds?

Answer 16

1. Blue Bonds
2. Climate Bonds
3. SDG/SDG-Linked Bonds
4. Social Bonds
5. Sustainability/Sustainability-Linked Bonds
6. Transition Bonds

Question 17

What is an ABSs? What is Securitisation?

Answer 17

Asset-backed securities (ABSs) are a type of debt product, similar to a bond.

Securitisation diversifies the risk of investing in the underlying loans, provided the pool of loans is itself sufficiently diversified and not highly correlated.