Green Bonds and Sustainability-Linked Bonds Overview
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Questions and Answers

What is the primary purpose of green bonds as described in the findings by Flammer 2021?

  • To lower the costs of borrowing for firms
  • To contribute directly to environmental programs
  • To serve as a signalling device for investors (correct)
  • To increase shareholder returns

    • What is one characteristic of Sustainability-Linked Bonds (SLBs) mentioned in the content?

  • They have a fixed interest rate regardless of performance.
  • They include a predetermined sustainability performance target. (correct)
  • They require no performance metrics to assess success.
  • They are guaranteed to improve firm profitability.

    • What happens to the coupon rate of SLBs if the predetermined sustainability performance target is not achieved?

  • It is canceled.
  • It is reduced.
  • It increases. (correct)
  • It remains unchanged.

    • Which of the following statements is true regarding the greenium associated with corporate green bonds?

    <p>The greenium appears to be quite small, if it exists at all.</p> Signup and view all the answers

    Which of the following factors can be part of the predetermined sustainability performance targets for SLBs?

    <p>Reducing CO2 emissions</p> Signup and view all the answers

    What is a key requirement of Green Bonds regarding proceeds?

    <p>Proceeds must exclusively finance or re-finance green projects.</p> Signup and view all the answers

    What must the issuer demonstrate regarding financed projects after issuing a Green Bond?

    <p>That the financed projects match the borrowed funds.</p> Signup and view all the answers

    Which of the following is NOT a component of the Green Bonds framework?

    <p>Interest Rate Variation clause.</p> Signup and view all the answers

    In the context of Green Bonds, what does 'Greenium' refer to?

    <p>The interest rate differential for green bonds compared to traditional bonds.</p> Signup and view all the answers

    Which company issued the largest green bond in the US as of November 2022?

    <p>Ford Motor.</p> Signup and view all the answers

    What kind of projects can proceeds from Green Bonds be used to finance?

    <p>Any projects that are considered green.</p> Signup and view all the answers

    Which statement about the use of proceeds in Green Bonds is true?

    <p>Proceeds can also be used to re-finance existing projects.</p> Signup and view all the answers

    What is a balance requirement for Green Bonds on the issuer's balance sheet?

    <p>Green assets must balance with the amount of green bonds issued.</p> Signup and view all the answers

    What is a characteristic of twin bunds?

    <p>They are nearly the same except for their size.</p> Signup and view all the answers

    What role does the 'greenium' play in green bonds?

    <p>It helps in identifying yield curves specifically for green EUR securities.</p> Signup and view all the answers

    How do green bonds typically utilize their proceeds?

    <p>Mainly to refinance existing green projects.</p> Signup and view all the answers

    What is a notable comparison regarding the greenium?

    <p>It has a minimal impact compared to other factors affecting cost of capital.</p> Signup and view all the answers

    Which of the following is true about the proceeds clause of the green twin bund?

    <p>It helps determine the 'greenium'.</p> Signup and view all the answers

    What primarily distinguishes green twin bunds from other sovereign bonds?

    <p>The size of the bonds themselves.</p> Signup and view all the answers

    What type of projects do green bonds typically not fund?

    <p>Traditional fossil fuel projects.</p> Signup and view all the answers

    Which statement about the impact of green bonds is true?

    <p>They often refinance existing projects rather than fund new ones.</p> Signup and view all the answers

    What is the Sustainability Performance Target (SPT) set by Holcim SLB?

    <p>475 kilograms of carbon dioxide per ton of cementitious material</p> Signup and view all the answers

    When does the coupon step-up for Holcim SLB occur?

    <p>If the SPT is not met by December 2030</p> Signup and view all the answers

    Which of the following is true about the potential penalty for Holcim SLB?

    <p>The penalty is calculated based on notional, step-up, and time to maturity</p> Signup and view all the answers

    What is the notional value of the Holcim SLB?

    <p>EUR 850 million</p> Signup and view all the answers

    What is a necessary condition for the relevance of SLBs according to the context?

    <p>Setting an ambitious target that goes beyond typical goals</p> Signup and view all the answers

    What is the maturity date of Holcim SLB?

    <p>23 April 2031</p> Signup and view all the answers

    How is the coupon for Holcim SLB structured?

    <p>0.5% p.a. with a potential step-up of 0.75% p.a.</p> Signup and view all the answers

    What does the 'size of coupon adjustment' refer to in the context of SLBs?

    <p>The percentage increase in coupon if targets are not met</p> Signup and view all the answers

    What is blended finance primarily aimed at achieving?

    <p>Mobilizing additional finance for sustainable development</p> Signup and view all the answers

    What is a significant challenge associated with blended finance?

    <p>Development banks may crowd out private investors</p> Signup and view all the answers

    What is the expected impact of the Allianz SDG Loan Fund?

    <p>Support for 60,000 jobs and avoidance of 450,000 tons of carbon emissions</p> Signup and view all the answers

    What is the mobilization rate of the Allianz SDG Loan Fund?

    <p>1:9</p> Signup and view all the answers

    What does the 25 million loan guarantee by MacArthur enable FMO to do?

    <p>Bear greater risk on their share in the fund</p> Signup and view all the answers

    What happens to the SLB contract if one of the three conditions approaches zero?

    <p>The SLB contract becomes irrelevant.</p> Signup and view all the answers

    What is the average yield premium for SLBs compared to regular bonds?

    <p>About 13 basis points.</p> Signup and view all the answers

    What factor is critical in determining the maximum penalty for SLBs?

    <p>Remaining maturity of the bond.</p> Signup and view all the answers

    How does the CFO of Axpo approach the issuance of SLBs?

    <p>By deciding on their renewable energy strategy first.</p> Signup and view all the answers

    What is the role of litigation finance in legal claims?

    <p>To support claimants financially to pursue legal interests.</p> Signup and view all the answers

    What immediate effect did the oil spill have on the Indonesian seaweed farmers?

    <p>They received compensation due to the lawsuit.</p> Signup and view all the answers

    What potential benefit might arise from the legal case against the Australian oil company?

    <p>It could set a precedent for future legal actions.</p> Signup and view all the answers

    What does the investment in litigation finance focus on after costs are subtracted?

    <p>Receiving a share of the payout.</p> Signup and view all the answers

    Study Notes

    Special Instruments Overview

    • Green Bonds, Sustainability-Linked Bonds, Litigation Finance, and Blended Finance are covered
    • Green Bonds are used to finance or refinance eligible green projects
    • Sustainability-Linked Bonds (SLBs) are a type of bond with predetermined sustainability performance targets (e.g., ESG rating, CO2 emissions)
    • Litigation Finance involves providing funding to claimants for legal disputes
    • Blended Finance leverages development finance to attract additional private sector investments in developing countries

    Green Bonds

    • Green bond issuance in billions of USD has increased significantly from 2014 to 2023.
    • Corporate entities issued the highest volume of green bonds in 2021
    • Ford Motor issued a USD 2.5bn green bond in November 2022, primarily for electric vehicle production. This was the largest green bond in the US at the time
    • Key components specific to green bonds include the use of proceeds, the process for project evaluation, and reporting on how the funds were used
    • Projects financed by green bonds do not need to be new, the proceeds can be used to refinance existing projects
    • Examples from co-investments in railway infrastructure are expected to save 15 million tons of CO2 per year.
    • Projects financed are not collateral for the bond
    • To qualify as a green bond, proceeds need to be specifically used for green projects.
    • Green bonds in the balance sheet need to be balanced by green assets
    • Twin Bonds refer to two sovereign bonds with near-identical characteristics except for size one being green and one conventional
    • There is a concept of "greenium"
    • The greenium is a small premium in yield for green bonds compared to similar conventional bonds.

    Sustainability-Linked Bonds (SLBs)

    • SLBs have a certain performance target related to sustainability
    • Targets include ESG rating levels, CO2 emissions, or number of female board members
    • Coupons can step up or down conditional on meeting the sustainability targets
    • The size of coupon adjustment, remaining time to maturity, and the ambition level of the target could make SLBs irrelevant.
    • Based on a matched sample, SLBs typically have a premium of about 13 basis points compared to regular bonds

    Litigation Finance

    • Litigation Finance is a process where investors provide funds to help claimants pursue legal actions.
    • For parties without sufficient resources, they may receive compensation after costs.
    • Litigation funds allow claimants to pursue cases even when they lack financial resources.
    • The litigation market in the EU-27 has shown significant growth since 2008

    Blended Finance

    • Blended finance uses development finance to encourage private sector funding in developing countries.
    • Blended finance involves attracting private investors to sustainable development projects.
    • The amount of blended finance mobilised was close to $50 billion in 2018-2019
    • Blended finance can support investments in renewable energy, agricultural production, and other sectors.
    • Challenges include perceived subsidy for private investors and potential for development banks crowding out private investors

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    Description

    This quiz explores the key concepts and characteristics of Green Bonds and Sustainability-Linked Bonds (SLBs) as detailed in Flammer's findings from 2021. Test your knowledge on their purposes, performance metrics, and the financial implications of these instruments. Understand the significance of greenium and the requirements for issuers.

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