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George W. Bush (GWB) nicknamed “Dubya” was sworn into office on January 20, 2001. The accidental president was placed in office not by an electoral vote required by law, or even a popular vote. It was the supreme court decision Bush v Gore that awarded Dubya the presidency. In his book the Price of loyalty, and the education of Paul O’ Neill Pulitzer prize winning author Ron Suskind provides a behind the curtain account, supported by over 19,000 legal documents concerning the Bush presidency and the Iraq war. With the world wide demand of fossil fuels skyrocketing due the emerging nations of China, India and Dubya’s public acknowledgement that America is “addicted to oil” the presidential decision to invade Iraq was made more than seven months prior to the World Trade Center terrorist attack. Both President Bush and V.P. Dick Chaney both lifelong oil men orchestrated a behind the scene invasion of Iraq. As a result of this preplanned unorthodox decision as of 2016 Iraq is now the second largest OPEC oil exporting nation in the world. Right behind Saudi Arabia which 15 of the 19 of the terrorist hijacks came from. At the time of the Iraq war decision, with president Bush having all the vision of a “bat” orchestrating the unwanted invasion it was preposterous, fossil fuels could soon become a stranded asset.
With 20 trillion dollars of fossil fuel assets on the public balance sheets of multinational corporations and sovereign wealth funds every single financial expert in the world laughed at notion they could soon become “worthless”. However it takes the power of the unexpected outside event to turn a notion on its head, a contrarian outlook for realization to come to fruition. Such an event occurred on April 22, 2016 Earth Day with 195 nations every single nation in the world signed the Paris agreement. A legally binding agreement to limit the global green house gas emissions to below two degrees Celsius. In order to adhere to limiting the worlds warming to two degrees Celsius 80% of the worlds fossil fuels will have to remain underground. Currently we are now seeing Esgbrokers and sustainable investors divesting billions of dollars of fossil fuels from their green Ira and Ethical401k accounts.
The BP Gulf oil spill released 200 million gallons of oil into the Gulf. Bp’s clean up methods following the spill covered up the public’s health impacts on the coastal communities. In the film documentary The rising, 1.8 million gallons of Corexit was used to clean up and disperse the oil spill. A known carcinogen to cause liver and kidney damage were sprayed into the air and water resulting in 50 times greater toxicity than the original oil spill. This has resulted in hundreds of thousands of chronically ill people due to the exposure of Corexit.
It took eight years following the George W. Bush presidency fiasco for a legitimately elected president Barack Obama to orchestrate for the United States to slowly emerge from the Iraq war, great recession and the painful hard lessons learned from failure of oversight of banking regulations, questionable rating agencies practices, aggressive sub prime underwriting standards. With all financial stakeholders being accountable for their fair share of the financial collapse. New financial markets are now emerging and take root from the fiasco. Like a phoenix rising from the ashes. Green real estate construction is now poised to account for up to 250 billion dollars in residential and commercial construction up to 30% of the new construction market by the year 2016.
When new nascent markets are developing and established soon new green financing mechanisms, are originated, standardized and implemented on a growing transparent scale. With the business environment currently being transformed, engaged investors, educated green stakeholders and a greedy wall street embracing sustainability as a core value, a new kid will appear on the block and take center stage to capture this growing financial market …..green securities! A security is a financial instrument either a bond which is a debt instrument, acting as a lender to the borrower, in first position in the case of bond default. Or a stock which is an equity instrument, portioned into shares, representing a fractional ownership in the business. Stocks are in second position behind bonds, in the case of liquidation of the company, and therefore are more risky for green investors. When residential and commercial green communities are build to a standardized verifiable third party recognized green building code, green real estate will become recognizable, defined, green labeled (differentiated) and marketed on the international market. Green neighborhood values will be verified, supported, documented, and quantified by the knowledgeable green appraiser.
Specialized green brokers, or commercial sustainable brokers will be able to articulate, demonstrate and showcase the intrinsic green value encompassed by green real estate to a growing educated investor population who will embrace sustainability and demand energy efficiency, improved indoor air quality, and environmental friendly features which will support the higher green appraised value of their green securities. Green communities are currently a fragmented market nationwide. This is slowly changing, consumers are now demanding energy efficient, environmentally safe, water efficient, and climate neutral neighborhoods.
Expanding green neighborhoods will be financed by green mortgages, or sometimes referred to as an energy mortgage. A sponsoring agent aka green underwriter will then bundle these green mortgages into financial pools in bytes of approximately 10 million dollars,or more and receive a bond rating from one of the major rating agencies (Moody’s, Standard or Poor’s) and then proceed to sell green securities on the world financial markets. These particular type of securities are called green MBS. Mortgage backed securities, The revenue stream, payments from the borrowers from the green mortgages will service the green bond debt.
As the green MBS securities market slowly develops these preferred securities will sell at a green premium… by using the exclusive “green label“ a new class of socially responsible investors will emerge. This new class of investors will be focusing on: ESG metrics, a 32% lower default rate from borrowers, and with a 30 year mortgage bond repayment, these green MBS securities will be more resilient from the emerging “brown discount“.
A new financial green underwriting enhancement tool has been specifically developed and will be implemented to differentiate and value green securities from conventional securities.
Developed by IMT the green value score (GVS) identifies and supports the green aspects of the green real estate property/portfolio. Providing an aggregate score from one to 100 focusing on energy/water efficiency, improved indoor air quality, location based attributes, and climate neutral certification. The medium green value score (GVS) is between 23-27 with a bell curve ranging from 18 to 30. Green real estate assets scoring 50 or above on the GVS illustrate clear market superiority from a market peer group. This is one way to easily identify, numerically benchmark and properly value green securities. The green value score utilized and incorporated in the green underwriting process will define and quantify green buildings showing increased cash flow, reduced operating expenses related to net operating income and lower risk associated with green property portfolio ownership.
The green value score will be used as a green underwriting enhancement tool by sustainable investors, financial institutions, rating agencies and market forces to identify and support a comparable green real estate property/portfolio. An apples to apples approach as opposed to an apples to oranges approach that has been used in the past. Resulting in market confusion, green washing claims, piecemeal marketing programs, and misrepresentation of green communities and commercial green real estate nationwide, thereby confusing the public at large. It has taken more than a decade to develop and implement the proper green credentials for each of the separate vertical green markets. “Smart convergence” has started with the green appraiser, following with green brokers, green contractors, green mortgages, green policyholders all following suit. And now the final green vertical…green securities! The green communities smart supply line is now able to be properly identified, financed and marketed!
The green MBS market is developed and being actively used by the Fannie Mae green initiative. However as we venture into the nascent evolving green bond market, there is no accepted definition of what actually constitutes what is green. Therefore the International capitol market association(ICMA) has developed green bond principals(GBP). Voluntary guidelines for transparency, disclosure in an effort to promote integrity for green bond principals. There are currently four types of green bonds. This will expand as the market develops, grows and matures. The four types of green bonds currently on the market are: 1. Green Use: of proceeds with standard recourse to the insurer. The proceeds of the green underwriting will be linked to the issuers investment operations for specified green projects. 2. Green Revenue Bonds: Non recourse to the insurer, using the pledged revenue from the cash flow of the bonds to finance green projects. 3. Green project Bond: Used to finance a single project. Investor has direct exposure to the risk of the financed project. This bond can be structured with or without recourse to the investor. 4. Green Secularized Bond: Collateralize by multiple market projects. Using cash flow from the secularized green assets. Examples could be rooftop solar PV or energy efficient assets.
These GBP can be divided into separate categories. The current categories include: Climate change, clean transportation, renewable energy, sustainable water, sustainable waste management, biodiversity, sustainable land use and energy efficiency. However these green bond principals (GBP)still lack teeth as there is no enforcement mechanism. No federal carbon pricing exchange, and continuous debate about climate change within both political parties. These deficiencies will be addressed in future revisions of the GBP. Green covenants will become standardized and written into green bond offerings.
On June 2017 the green bond principals were upgraded to clarify and strengthen the voluntary guidelines. Updated green principle language includes: Project funding and trace-ability language, expanded definitions of green categories, suggested new impact reporting metrics. Additional issuer guideline upgrades include a previous missing link between use of green securities proceeds and sustainability practices in the credit risk assessment which is unique to green bond underwriting. Investor communications from each green bond issuer, reporting of their environmental strategy and management of environmental and social risk factors designed to document the measurable impact of green bonds on the world wide environment.
With corporate annual sustainably reporting and environmental stewardship taking a leading competitive role. Corporations will voluntary limit their carbon footprint to limit the worlds global warming to two degrees Celsius. The international market will take a lead role in climate change as a result of the cop21 Paris agreement. Insurance companies will become financially liable for climate change weather disasters.
In 2017 over 100 billion dollars of green bonds were issued. China is the worlds issuer in green bonds accounting for 33 billion dollars in 2017, over 30% of the worlds market. The market is expanding rapidly. Sovereign government Poland will be issuing a 800 million dollar green bond offering investors a green premium on yield returns.
Green bonds are currently less than 1% of the global bond market which is valued at 90 trillion dollars and growing annually! Debt, bonds in particular is the preferred security of choice to raise funds for capitalization, due to its cheaper financing costs, and predictable cash flows.
An extension of the green bond market is the climate bond market. Green bonds are issued using the climate bond principals as green underwriting guidelines, and are used to finance an environmental project. By contrast a climate bond a new asset class, is issued to raise funds to finance environmental investments in greenhouse emission reduction, or climate change solutions. Climate bonds are theme bonds and are conventional fixed debt green securities. Specifically climate bonds use the funds to facilitate a rapid transition from a low carbon economy to finance a climate change solutions.
With 100 trillion dollar bond market available, there has to be a transparent precise definition as to exactly what constitutes a climate bond. Helping to Fill this global void is the climate bond initiative. An impressive international non profit organization developing and implementing the specific green underwriting criteria to validate a certified climate bond. In addition to setting the climate bond green underwriter criteria, The climate bond initiative researches and educates institutional investors, governments and banks, providing options for governments that support a transition from a low carbon economy with credit enhancements and guarantee’s. The climate bond standard is a third party screening tool providing the necessary due diligence, validating the green integrity and providing and assuring confidence the green securities are actually used to finance a climate change solution. This transparent green underwriting criteria avoids any potential green washing claim from any dubious third party, and reduces the potential lawsuits that may arise from such a false accusation.
The climate bond certification is comprised of three separate elements: The pre issuance process, the post issuance process and the periodic certification process. These comprehensive green underwriting guidelines are continually evolving, with periodic updates, amendment’s, additions and deletion’s as designated by the climate bond initiative growing impressive membership. As a result of the 2016 Paris agreement we will see a scaling up of green securities as investors seek to transition into a low carbon economy.
The world bank which is the largest provider of public finance to developing countries will develop its own separate standard of green underwriting criteria. The world bank will shift over 25% of its funding to worldwide projects to support climate change initiatives. The focus in the future will be global warming. With 195 nations signing a binding commitment to reduce global greenhouse gas emissions to limit greenhouse gas emissions at or below two degrees Celsius. Projects to be financed will be Energy and water efficiency projects, green infrastructure, resiliency, renewable energy and low carbon transport. Currently the market now has three separate green underwriting criteria financing labels. The green bond initiative, Climate bond criteria and soon to be developed the World bank green underwriting guidelines.
The green financing market is fractured, and the market needs clarification and verification as exactly constitutes a universally green project. Eventually a transparent universally accepted, green underwriting guidelines will converge, green securities will be issued and trade at a market premium. The green standard has been originated, implemented, verified and validated by a third party. Thereby any individual government, corporation, issuer, or questionable third party cannot decide and state the green bond, is fraudulently labeled “green.” The green underwriter validation/certification enhances an issuers reputation, attracts a wider international range of investors, accommodates validates the sustainability reporting requirements and eliminates any potential for future controversy. Thereby legal documenting these green securities over 95% “investment grade” attracting billions of dollars from pension funds, sovereign wealth funds, trust funds, insurance companies, and foreign governments. Thereby by juxtaposition, as we can all recall the “junk bond” fiasco, Ivan Bosky and the following economic collapse from 1987 “black Monday” The previous economic fallout that taxpayers previously financed.
After decades of continual incompetence, sustainability finally being rightfully recognized, and adopted as a core value, annual sustainability reporting requirements, there is a huge demand for legitimately third party labeled green securities. Therefore the focus has now shifted to the supply side demand. The current market is minuscule in scope, the goal is to reach a trillion dollars a year. This figure would attract global attention and provide a much need labeled financial mechanism for green infrastructure, solar energy, wind energy, transport, agriculture, forestry, water, aggregated energy efficiency buildings infrastructure/upgrades, biodiversity and pollution green underwriting criteria.
To help fill the market void, set a standard, for transparency and disclosure as to what constitutes a legitimate certified green project. On March 30, 2016 Moody’s investor and research service introduced its Green Bond Assessment(GBA). The GBA is not a rating, it is designed for evaluating a green bond issuer’s administering, managing, allocating and reporting on the green bond proceeds. Designed for all green bonds worldwide.
The GBA is based upon five key areas: Organization, Use of green proceeds, Disclosure use of proceeds, Management of proceeds, and ongoing reporting and disclosure of environmental projects. Moody’s will score each green bond with the five factors, adding weight to arrive at a composite score for their relative importance. The composite score will be an overall green assessment ranging from GB1 (Excellent) to GB2 (Poor). The green bond assessment score can be used to inform: investors, corporations, financial institutions, governments, and other market participants.
On November 2017 moody’s investor services stated the increased effects of climate change will have a negative effect on US state and local bond issuers. With extreme weather related events causing increased property damage, infrastructure damage and escalated recovery costs. Moody’s will now assess and incorporate climate risks in analyzing municipalities credit ratings.In the event local communities fail to prepare for extreme climate events by investing in infrastructure and resiliency improvements local issuers credit ratings could be lowered and be subject to higher interest rates on their local bonds.
In the near future, new federal laws will be enacted and implemented to address the cost of energy efficiency and water consumption in operating residential/commercial green real estate. The save act, sensible accounting to value energy (SAVE) will be a federal requirement in the adopted green appraisal energy mortgage, green underwriting guidelines. The save act deals directly with federal agencies ( Fannie Mae, Freddie Mac) As these two quasi government agencies (GSE)insure approximately 90% of all mortgages originated. Freddie Mac is currently involved in adopting and underwriting multi family green mortgages in the secondary market. As the green securities market continues to evolve. In a first of its kind of study addressing energy efficiency. Comparing 30k energy efficient homes to 70k conventional homes national default rates are 30% lower in energy efficient properties. More poignantly the more efficient the green home the lower the default rate, for each point on the HERS scale the default rate of the green mortgage drops. Therefore the financial risk incorporated into green certifed properties can now be quantified and incorporated into financial risk adjusted models!
As this national nascent data is collected, collated, and analyzed under a microscope future considerations and possibilities will include: green lenders allowing a significant lower interest rate for all types of green certified properties, a more flexible credit profile allowed from borrowers, a higher value assigned to green security portfolios. Market forces and competition will come into full effect, and the value of conventional properties will continue to fall. Future endeavors will include developing, analyzing and applying specific risk adjusted models to net zero real estate. Net zero real estate development and construction is currently in its infancy nationwide. Located at the extreme end of the green building scale, a net zero home produces as much energy as it consumes. Some of these super efficient homes even produce more energy than they consume. Returning valuable energy to the national grid. This nascent market is slowly developing and emerging with valid recognized third party certifying agencies.
As the green securities market is rapidly developing worldwide, Aegon one of the world’s largest insurance companies, recently was selected to participate and purchase the first international green residential mortgage backed securities.(GRMBS). The green bond offering called Green Storm was a EUR 500 million offering which was over scribed by sustainable investors. Due to the enormous amount of investor interest in a green labeled bond offering, investors were selected by an assessment of their green credentials, commitment to global warming, United Nations and industry standards.
Aegon was selected as one of the greenest of the green investors (aka dark green), due to their three pillars of social related investing(SRI).
- Aegon impact investments that generate measurable social, environmental and beneficial impact along with a financial return.
- Environmental, Social and Governance (ESG) criteria is integrated into Aegon’s investment analysis.
- Aegon is an active owner in applying exclusive criteria, green underwriting management on ESG issues, and using their voting rights.
Worldwide sustainable investors haven taken notice of the rapidly expanding green securities market. Analyzing the EUR Green Storm offering The definition of “green” is now a deciding factor in green investor selection and participation. As billions of dollars divest from the the fossil fuel industry this is an important fact not to be overlooked. As millions of today’s purchasers are now scrutinizing corporations behavior. Not all dollars are welcome due to previous behavior/commitments. Corporate accountability is now a relevant deciding factor. Corporations are being monetarily punished for their past actions. Witness Peabody Energy Company the 5oth. coal company to declare bankruptcy since 2012.
The George W. Bush administration started a war over oil, fossil fuels specifically to bring more oil on the world market. Fossil fuels are now a stranded asset and will loose value in the future as the world now is moving rapidly towards a sustainable economy along the triz scale. With Dubya’s now documented failure as a leader and failed US vision, trillions of dollars was added to the US deficit and 16 years of time was taken off the clock. Two failed terms of Bush’s presidency and two terms for Obama to clean up the GOP fiasco. With this misstep which the GOP will now be held accountable for, the world did not stay still, it moved ahead and focused its attention on resources other than fossil fuels.
the rise of the green securities exchange (ldx)
Luxembourg is one of the most notable worldwide tax havens of many US corporations due to its political stability, advantageous huge tax incentives, corporate secrecy laws, and offshore asset protection. Well known companies such as Wal mart, PepsiCo, and AIG are known to create subsidiaries in Luxembourg to cut US corp. tax rates from 35%.
In September 2016 Luxembourg created the worlds first green securities exchange called the LDX. Acting as a gatekeeper, green fiduciary allowing only 100% green securities to be traded on this international platform. Green securities are defined as green bonds using the GBP principals, climate bonds, green ETF’s, ESG securities,100% social, or sustainable.
The green securities will have to be environmentally focused financial instruments. Issuers will be obligated to provide a full set of documentation, with an external independent third party review with pre and ongoing post reporting of the projects for green securities trading compliance. Each green bond will be evaluated at two levels,Investors will consider the sustainability of the issuer’s business model and strategy. Investors will also evaluate the specific underlying project and see if it aligns with the green investors sustainability underwriting requirements.
This will eliminate the claims of green washing and screening of securities issuers. The LDX will not set rules defining as to what constitutes green. The LDX will have instruments with different shades of green. This will allow investors to select the green shade of instrument to match their corporate policies. This is due to the overwhelming investor demand of the Green Storm offering while the market is still seeking standardized reporting methods.
The LDX is the first time a stock exchange ANYWHERE requires green securities to adhere to stick eligibility requirements. Immediately 45 billion dollars of green bonds will trade on the LDX green securities exchange. With the expectation of 100 billion in the next few months. The COP21 agreement has set the stage for trillions of dollars which will be needed to finance the transition to a low carbon economy. The LDX is now the preferred dedicated green securities exchange to match both issuers and sustainable investors. The International Energy Agency (IEG) estimates that the world will need one trillion dollars a year until the year 2050 to finance low emissions. The LDX will provide liquidity, greater transparency, trust allowing only 100% green securities to be traded.
The total amount of green bonds issued in 2018 was 135 billion dollars worldwide. As of September 2019 140 billion dollars in green bonds have been issued. A 60% gain over 2018. Total green bonds issued in 2019 will be over 220 billion dollars. As the green bond market experiences rapid growth, continues transformation the green securities market will fracture to incorporate companion ESG underwriting criteria/data.
As the United States was misguided, sidetracked, by the Bush administration and focused on an ill conceived Iraq war, over fossil fuels, the US is now 10 years behind the world wide recognition integration of Environmental, Social and Governance risks. (ESG risks). A full decade lost in the International arena. As the current United States government continues to debate about climate change, for over 40 years. ESG risks are now incorporated world wide leaving the US in a vulnerable lackadaisical position in world financial markets. What was once the exclusive reservation of liberals, climate scientists and left wing nut politics. Is now becoming fundamental financial underwriting analysis, adding the elusive overlay of ESG underwriting risks now effects financial performance, therefore ESG is now relevant in worldwide financial markets.
ESG factors are subjective,broad,diverse and undefined. Incorporating ESG underwriting acts as a quality screen helping to mitigate quantified risk, lowering volatility which correlates with credit risk. ESG underwriting includes: ancillary risks and externalities traditionally not incorporated into green securities underwriting.
WHAT IS ESG?
ESG is the acronym for Environmental, Social and Governance. (ESG). Environmental can include: climate change,Co2 emissions,and energy efficiency. Social can include: human rights, worker standards and inequality. Governance can include: board structure, compensation, compliance commitments and transparency.
Currently there is over 100 ESG data providers. (Sustainalytics, Vigeo-Eiris, MSCI) who specialize in aggregating non financial data which corresponds to: ESG risks, Key Performance indicators(KPI), and ESG scores. As the amount of data escalates for each ESG underwriting commitment (ESG bonds, ESG Loans) providers are incorporating Artificial Intelligence (AI) to uncover disclosures,coordinate unrelated ESG data at scale. Connecting pertinent, seemingly unrelated abstract factors that enhance traditional green underwriting.
With ESG scores effecting corporation/government/sovereigns, financial evaluations, access to financial markets and green securities marketability. In the near future ESG data/scores will become mandatory regulated disclosure, along with companion bond ratings and analyst ratings.
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