Green Bonds and Sustainability-Linked Bonds Overview

A type of bond where the proceeds are specifically used to finance or refinance 'green' projects, which are projects that have a positive environmental impact.

A clause in the bond contract that specifies that the proceeds of the bond will only be used to finance or refinance 'green' projects.

The process of evaluating and selecting which projects qualify as 'green' and are eligible for financing with the proceeds of the green bond.

Reporting on how the proceeds of the green bond were actually used to finance or refinance 'green' projects.

A potential premium paid for green bonds due to their perceived lower risk compared to traditional bonds.

Green bonds are recorded in the balance sheet as liabilities, and the corresponding assets are the green projects funded by the bonds.

The total amount of green bonds issued worldwide each year.

The total amount of bonds issued worldwide each year.

Bonds that offer a coupon rate that changes depending on whether a company meets pre-defined sustainability targets.

A pre-determined sustainability performance target that a company needs to achieve by a set date.

A feature of SLBs where the coupon rate is increased if the company fails to meet the SPT, and decreased if they succeed.

Green bonds signal a company's commitment to environmental sustainability, potentially attracting investors who prioritize ESG factors.

Two government bonds with almost identical features, except for their size. The green twin bond includes a "use of proceeds" clause, meaning the funds raised will be used for environmental projects.

Green bonds often finance projects that were already planned or refinance existing green projects, suggesting their impact on new green investments may be limited.

The extra value investors are willing to pay for a green bond compared to a conventional bond with the same risk and maturity.

The greenium is a relatively small factor compared to other factors that influence the cost of capital, such as risk and market conditions.

The "greenium" and the yield offered by green bonds can be used to create a yield curve specifically for green euro securities.

Green bonds have the potential to influence environmental finance by making it more attractive to investors who are seeking to align their investments with their values.

The monetary benefit that a bondholder receives on top of the standard interest rate if the company reaches its sustainability performance target.

The potential financial penalty that a company could face if it fails to meet its sustainability performance target. Usually, this means foregoing the coupon step-up.

A key factor that determines the effectiveness of a sustainability-linked bond is the level of ambition set for the sustainability performance target. It needs to be challenging enough to drive real change, but also achievable within a reasonable timeframe.

One of the factors that influence the impact of a sustainability-linked bond is how much the coupon payment increases when the sustainability performance target is achieved. A larger step-up provides a stronger incentive for the company to reach its goal.

Another factor that determines the effectiveness of an SLB is how much time remains before the coupon adjustment is triggered (when the company needs to reach the target). A shorter time period creates more urgency.

SLBs are expected to have a significant impact on corporate behavior, encouraging companies to focus on their environmental and social performance. Achieving these goals often involves investments, changes in practices, and adopting new technologies.

Blended finance strategically combines public development finance with private capital to attract more investment for sustainable development in developing countries. It's a way of leveraging public funds to encourage private sector participation in projects addressing global challenges like poverty, climate change, and inequality.

Blended finance structures aim to mitigate the risks associated with investing in developing countries. This involves using various financial instruments, guarantees, and subsidies to make investments more appealing to private investors, while ensuring positive social and environmental outcomes.

A key challenge for blended finance is the potential for development banks to be perceived as subsidizing private investors or crowding them out. This can lead to concerns about fair competition and the efficient allocation of resources.

The Allianz SDG Loan Fund is an example of blended finance that combines a loan guarantee from MacArthur with investments from FMO (Dutch Development Bank). This structure allows FMO to take greater risk on its investment, supporting projects in developing countries that aim to achieve the Sustainable Development Goals.

Blended finance has the potential to unleash vast resources and accelerate progress towards the Sustainable Development Goals. It offers innovative solutions, but careful design and implementation are critical to ensure its effectiveness and avoid potential pitfalls.

A type of bond that offers an additional coupon payment if the issuer doesn't meet specific sustainability targets like reducing carbon emissions.

SLB investors receive a higher yield than traditional bonds, often around 13 basis points on average. This indicates that investors value the sustainability benefits associated with SLBs.

The potential for a step-up coupon payment, which depends on the performance of the company's sustainability targets. This extra payment incentivizes the issuer to meet these objectives.

The potential penalty that the issuer might have to pay if they fail to meet their sustainability targets. This is calculated as a percentage of the remaining time to maturity.

An agreement between an investor and a claimant, where the investor provides funding to pursue a legal claim in exchange for a share of the payout. This can be beneficial for claimants who lack the financial resources to pursue their claims.

The direct impact of litigation finance is on the claimants, who receive funding to pursue their legal claim and potentially get compensation. There is also an indirect impact on the defendant, as they may have to pay resources to settle the claim.

Beyond the immediate impact, a successful litigation financing case can set legal precedents that protect similar claimants in the future, preventing similar injustices.

Aristata is an example of a litigation funding company that supports cases like the Indonesian seaweed farmers lawsuit. It highlights the growing trend and importance of litigation finance in combating environmental injustices.