Week 4 Flashcards
(43 cards)
what is the main source of funding for companies?
debt - not stocks and equity
Why is equity still important to consider in terms of funding?
credit markets provide the bulk of finacing for companies but equity is important as there is the requirement for an equity cussion to allow for borrowing without issues of excess leverage and financing viability
What are the downsides of being a bond holder in terms of engagement?
limited engagement - not voting power
Why is equity better to look at in terms of transition risk?
equity markets are the primarly lens to view transition risk manifested - primarily place for negative shocks of climate change
equity is the first loss tranche on the liability side of a company - equity is a junior claim to debt
Why is debt still an interesting place to look in terms of transition risk?
debt is required to finance the funding for the energy transition - turn to debt markets first for renewable energy and sustainable energy projects
what are green bonds?
used to finance environmentally friendly projects such as renewable energy, energy efficiency, water conservation and climate change adaption
for investors they are part of the sustainably themed approaches
What are the three main labelling schemes for green bonds?
ICMA green bond principles
climate bonds standards
european green bonds proposed legsilation 2022
Who determines whether a bond is green?
not really any regulation on green bonds - apart from China where there is ban on green bonds for energy companies
mainly labelling authorities - ICMA green bond principles and some regulation
What are the ICMA green bond principles?
- use of proceeds
- the issuer must communicate the environmentally sustainability objectives of the eligible green projects
- the net proceeds should be credited to sub-accounts - process for project evaluation and selection
- management of proceeds
- reporting - the annual report should include a list of the projects to which green bonds proceeds have been allocated, a brief description of the projects the amounts allocated, and their expected impact
What is the point of a sub-account?
not used for soverign bonds
idea of the fungability of money at least formally we are saying that we are putting the money aside to break this fungibility of money issue
easier to monitor how the money gets spent - there is a record for investors to be able to verify how it is spent
What is the Luxembourg green exchange?
2007 listed the first green bond to enter the market
the European banks; climate awareness bond
entry is restricted to issuers and asset managers that provide full disclosure and fulfil their reporting obligations
What are sustainability linked bonds?
unlike green bonds they dont have use of proceeds instruments - they are can be used to finance any corporate activity
the issuer commits to reaching ambitious, science-based and measurable sustainability performance targets (SPTs) around predetermined KPIs and to having these reviewed by an external party
what happens if you dont meet the targets associated with the sustainability linked bonds>
coupon payments go up
Who has the biggest bond market and the biggest green bond issuance market?
The US has the biggest bond market
the europe has the largest issuance of green bonds - Europe are leading the way to transition to net zero
Who is the main issuers of green bonds?
soverign green bonds are gorwing
however the largest issuer is finance corporate
What is the most common use of proceeds reason?
Energy 52%
only 3% for adaption
most of ht money raised through green bonds goes to mitigation only a little bit goes to adaption
Why is there more issuance of bonds for mitigation rather than adaption?
Difficulty with financings adaption - not tied to a cash flow stream
most mitigation problems generate a cash flow stream - solar powered plants will sell electricity and generate cash flow streams - easier to finance
Are green bonds a flawed concept?
money is fungible - even if funds raised through a green bond issue go to a sustainable investment, other funds are freed that could fund brown operations
–> most funding is internally sourced therefore you are not preventing the funding of potentially brown or environmentally degrading projects
credit risk is embodied in the issuers balance sheet
the fact that a bond is green and other debt is not does not provide any special privilege or seniority per see in bankruptcy
- the green bond couldn’t lower the credit risk associated with the bond
there may be no risk mitigation involved in the issuance of green bonds
how do you work out the credit risk?
probability of bankruptcy given default
x
loss given default
why do companies issue green bonds?
signalling
- advertising that they are doing the right thing
greenwashing
- fungability of money is an issue
- greenwashing doesn’t change a companies emissions doesn’t matter if they issue a gb or not
investor clientele
- ESG funds pitch that they are ESG funds but have to prove it by buying ESG assets - easy way of saying you are an ESG fund
What did Flammer (2019) find about US Corporate Green Bonds?
sampled 217 bonds issued by public companies
issuers tend to be a larger companies, in industries with high environmental materiality
issuers tend to be leaders in ESG performance
RESULTS
- positive cumulative abnormal return announcement effect of a green bond issue
- effect is stronger for issuers in industries with high environmental materiality
emissions reduction of 21.6 tones of Co2 per $1m of assets
REDUCTION OF 27.7%
no greenwashing
How are the green bonds emerging in emerging markets?
regulation and official guidelines - china
liting requirements - south Africa
private institutions - Brazil
How is the IFC involved in green bons?
IFC provides public money and due to its investment in the fund it brings in private sector institutional investors
- reduces the risk for private investors because the public money that goes in is the junior tranche
- private money is the senior tranche
idea of blended finance
estimates a 30 trillion dollar potential market for blended finance
What are the potential benefits for investors for green bonds in emerging markets?
- long term maturities with stable and predictable returns - with given risk exposure
- provide environmental benefits
- satisfy ESG requirements for sustainable investment mandates eg. IFC Performance standards
- Enable direct investment in the greening of brown sectors and social impact activities
- provide increased transparency and accountability on the use and management of proceeds
