Questions and Answers
What is the main focus of use-of-proceeds financing?
Ringfencing proceeds for a specific sustainable use
Which organization has been the global standard for use-of-proceeds financing?
International Capital Market Association (ICMA)
What is the primary feature of green bonds?
Strictly sustainable use of funds
In what areas have banks extended the concept of use-of-proceeds financing?
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What is the distinguishing feature of sustainability-linked financing?
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What factor determines coupon payments in sustainability-linked financing?
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Which type of financing is bound by sustainability commitments in its payment structure?
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'Rachet' on coupon payments in sustainability-linked financing refers to what characteristic?
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What is the primary role of the European Union's taxonomy for sustainable activities in relation to sustainability-linked financing?
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Which aspect do banks considerably differ in regarding accounting practices?
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Study Notes
Sustainable Banking
- A sustainable credit card can be issued by conventional banks or dedicated sustainable lenders, featuring charitable donations or tree planting based on consumer spend.
- Sustainable credit cards may include pledges for the bank to operate sustainably, such as using renewable energy or not lending to non-sustainable entities.
Deposits and Liability
- When a bank receives a deposit, it is considered a liability, as the bank may need to return the money to the client in the future.
- Green deposits involve pledging to use deposits to create green assets.
- Due to fractional reserve banking, deposits can be lent out multiple times to support credit creation.
Sustainable Mortgages
- Sustainable, or green, mortgages reward borrowers who purchase energy-efficient homes or commit to making improvements.
- Assessment is typically based on an Energy Performance Certificate (EPC).
- Energy-efficient homes are offered superior financing rates, and the resultant loans can be repackaged and securitized into green MBS.
Use-of-Proceeds Financing
- Use-of-proceeds financing involves providing loans or organizing bonds with proceeds ringfenced for a specific sustainable use.
- The most common form of use-of-proceeds financing is green bonds, with issuance exceeding USD 3 trillion since their 2008 debut.
Sustainability-Linked Financing
- Sustainability-linked financing involves coupon payments dependent on hitting and/or missing sustainability targets.
- This type of financing has grown rapidly since 2017, but concerns over greenwashing and unambitious KPIs led to a decline in year-over-year volumes in 2022 and 2032.
Banking and Financing
- A bank is a financial institution licensed to receive deposits and make loans.
- Bank assets predominantly consist of various forms of financing to third parties, such as mortgages, credit cards, and corporate financing.
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