STRA Quiz 2 PDF

Ch.4 1. Social Loans a. Exclusively for financing/refinancing eligible social projects b. Eligible Social Projects may include i. Affordable housing projects ii. Affordable basic infrastructure c. Advantages may include i. Positi...

Ch.4 1. Social Loans a. Exclusively for financing/refinancing eligible social projects b. Eligible Social Projects may include i. Affordable housing projects ii. Affordable basic infrastructure c. Advantages may include i. Positive impact on target population ii. Help deliver UN SDGs d. 4 Core Components i. Use of Proceeds ii. Proceeds for Project Evaluation and Selection iii. Management of Proceeds iv. Reporting 2. Sustainability-Linked Loans (SLLs) a. APLMA, LMA and LSTA (tested previously) b. Definition i. No projects, used for general purposes ii. The borrowers aim to achieve quantifiable objectives (SPTs) 1. The company has no green projects -> SLL is lent to motivate the company to start green projects -> The company borrows green loans to repay SLL iii. 5 Core Components 1. Selection of KPIs a. Relevant, quantifiable and benchmarkable 2. Calibration of SPTs a. Based on recent performance b. Benchmarking approach i. Using peers in the same industry, same country or same nature ii. Science-based approach 3. Loan Characteristics a. An economic outcome when the SPTs are achieved i. If SPTs are met -> Interest rate decreases (financial incentive) ii. If SPTs are not met -> Interest rate may increase or remain unchanged b. For negotiation for the loan, the borrowers may modify the SPTs 4. Reporting a. At least once per year  5. Verification a. External and independent verification of the borrowers’ performance is required 3. Green Bond a. ICMA b. Core Components and Transparency i. 4 Core Components of Green Loan ii. Transparency Components 1. Green bond frameworks a. Frameworks and legal documents should be readily accessible to investors (e.g. website) 2. External reviews a. External review providers to review pre-issuance 4. Green Loan v.s Green Bond a. Financing Sources i. Loan: Banks ii. Bond: Individuals (Investors or Asset Managers) b. Amount i. Bond > Loan c. Interest rate i. Loan: Floating ii. Bond: Fixed d. Maturity i. Bond > Loan e. Eligible green project determination i. Loan: Negotiation between Bank and Borrower ii. Bond: Issuer f. Management of Proceeds i. Loan: money is transferred from lender to borrower upon eligible green projects (separate accounts) ii. Bond: money is transferred from investors to issuers after bond issuance (temporary non-green usage might exist) g. Use of external reviews i. Loan: relationship-driven, could be waived ii. Bond: market-driven, more common to have h. Framework i. Only bond has 5. Social Bond a. Basically the same as Green Bond with extra transparency 6. Sustainability Bond a. Exclusively finance or re-finance both green and social projects b. 4 Core Components 7. Sustainability-Linked Bond a. Same as SLL (5 Core Components)  b. However, if SPT is not met, there will be a penalty of increased interest rate (step-up coupon) Ch.5 1. Global Sustainable Investment Overview a. Europe and US are the two highest b. ESG Integration, Value-based and Engagement are the top 3 strategies c. Strategies are not mutually exclusive, but using more strategies will reduce the investment options available d. Retail took up 25% of total sustainable assets in 2018 e. Public Equity is the main category which sustainable investment takes place f. Investment strategies vary according to region i. Europe: Engagement ii. US: ESG Integration iii. Japan: ESG Integration 2. ESG Strategies a. Value-based Exclusions i. Industry-dependent ii. For conglomerate/Investment Holding Companies (more than one business), excluded based on the percentage of income from negative activities iii. Positive screening (inclusion), Negative screening (exclusion) b. Norm-based Exclusions i. UN-principles on human rights, labour rights, corruption… c. Best-in-class i. Use ESG score as a base for exclusion (requires outsourcing for scoring) ii. Mainly active equity strategies iii. Large cap companies d. Thematic Investment i. Mainly active equity strategies ii. Small to mid cap companies iii. Circular economy is No.1 in thematic e. ESG Integration i. Integrating ESG aspects into traditional financial management ii. Forecast of cash flow f. Impact Investing i. Impact on the world besides financial return ii. Across asset class, mostly on listed equities and bonds  3. Engagement and Proxy a. Interactions between investors and investees b. Top 3 Investor Engagement Priorities i. Climate risk and energy transitions ii. Workforce and board diversities iii. Strategic workforce issues beyond diversity 1. AI and machine learning 2. ESG 3. Data Analytics c. Management Dialogue i. Shareholder letters Ch.6 1. ESG Disclosure Benefits and Costs a. Reduce information asymmetry b. Facilitate monitoring of ESG KPIs, performance and targets (SLL, SLB) c. Time cost + Financial Cost d. Avoid having misrepresentation in disclosure, i.e. fact-based 2. Voluntary v.s. Mandatory Regimes a. b. A result of the global financial crisis c. Significant information gaps in reports, such as World Bank or IMF having more focus on risks and future development 3. TCFD (Task Force on Climate-related Financial Disclosure) a. 4 Big Pillars  i. 4. ISSB a. IFRS Accounting Standards are equally important as IFRS Sustainability Disclosure Standards b. 4 Big Pillars (same as TCFD) c. IFRS S1 is sustainability-related while S2 is climate-related 5. HKEX ESG Reporting a. 2016 i. Upgrades general disclosures to “comply or explain” provisions b. 2025 i. Mandate climate-related information in ESG reports c. Main Board Listed (Large cap) and GEM Listed (Small to mid cap) d. 2 Disclosure Levels i. e. The Board and ESG Working Group i. The Board 1. Takes responsibility for ESG governance ii. Working Group 1. Senior Management or Business Union 2. Internal and external materiality assessment (double materiality) 6. Reporting Boundaries a. i.e. what subsidiaries to include in ESG reporting b. Different ways to determine the boundaries i. Following the scope used annual reports ii. Financial threshold (inclusion of subsidiaries contributing a certain percentage of total revenue) or risk level iii. Different scopes for different aspects/provisions 7. Materiality Assessment a. Materiality is one of the keystone Reporting Principles b. Internal materiality assessment should be conducted by senior/key managers c. Materiality aspects vary depending on geographical location, industry and other factors d. Stakeholders i. Parties who are affected by, and can affect the actions of the issuer e. Materiality Matrix i. ii. Double Materiality 1. Internal (on business) 2. External (on stakeholders)