Week 10 - ESG and Debtholders Flashcards
What are green bonds
a type of debt classified as a socially responsible investment. On issuing this type of bond, a company - private or public - receives funds that must be used exclusively to finance or refinance (partly or fully) projects with a positive impact on the environment.
What are transition bonds
Sustainability linked, designed to assist in achieving a specific ESG target, but is less stringent than a fully green bond
What is a sustainability LINKED bond/loan (SLLs)
A loan / bond where the interest rate or other terms are linked in the borrowers sustainability performance
give an example of a green bond
UK’s first green gilt raises £10 billion for green projects
What is (Flammer 2021)’s evidence that green bonds work
- Improved environmental performance following issuance (higher environmental ratings and lower CO2 emissions)
- Signalling: by issuing green bonds, companies credibly signal their commitment towards the environment
What is signalling
By issuing green bonds, firms are credibly signalling their commitment towards the environment
What does Greenium mean
Greenium is the premium price of green bonds, relative to the price of existing comparable non-green bonds
What did Larcker and Watts (2019) say that went against green bonds
(Larcker and Watts, 2019) said that ‘Greenium’ for green bonds did not exist.
Comparing green securities to nearly identical securities issued for non-green purposes by the same issuers on the same day, we observe economically identical pricing for green and non-green issues
Investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects
What did (Pastor et al. 2022) say that went against green bonds
(Pastor et al. 2022) gave example of German twin bonds. Each bond was issued with the same characteristics as an existing conventional bond.
Average Greenium: -4.6 basis points
What are some controversies around green bonds
Green bonds do NOT cut carbon. Firms that issue the most green bonds tend to be cleaner in the first place
Green bonds do not always reduce the cost of borrowing
Advantages of sustainability linked bonds
Advantages:
- Aligns financial and sustainability objectives
- Encourages companies to set and achieve sustainability targets
- Lender monitoring: borrowers’ sustainability performance is regularly reported to ensure transparency and accountability
Concerns of sustainability linked bonds
Concerns:
- How to effectively measure ESG metrics
- How to set the right threshold for ESG metrics
- How do lenders effectively monitor
What is (Kim et al. 2023)’s evidence that SLLs work
- Borrowers ESG scores deteriorate after the issuance of low disclosure quality SLLs
- Lender is willing to reduce interest rate by 10 basis points if the borrower meets certain E&S KPIs
Give an example of a sustainable bank
Triodos Bank, a sustainable bank based in the Netherlands. It provides loans, savings accounts and investment opportunities that aim to have a positive impact on people and the environment
Overall, what does the evidence suggest about the green bond/loan market
- So far, evidence suggests that green debt securities, especially those issued by corporations and banks make little impact on the environment
