are evolving climate finance
instruments, stocks(equity) and bonds(Debt) issued by companies that are committed to the principals of environmental sustainability to minimize their negative impact on the plant. As the world transitions from “brown” to “green”
trillions of dollars will be invested. It is estimated 12 trillion dollars will be required. As worldwide financial and governmental regulations are enacted specific green securities will be used for climate transition from “brown to green”. The selected financial instrument will eliminate “greenwashing”
as specific ESG metrics
and transparency are applied to each financial instrument.The Luxembourg Green Exchange (LGX)
is the worlds largest platform dedicated to sustainable finance. With over 36,000 securities, 2,500 issuers, and over 100 separate countries, The LGX represents over 50% of the trillion dollar green bond
market. The EU has the worlds first green taxonomy
defining exactly what is “brown” and what is “green”. The United States, not a world leader, out in left field for more than two decades, with the election of president Biden has now initially engaged the SEC
to evaluate what is “ESG”. And for the record lets be clear. Larry Fink CEO of Blackrock with 7 trillion dollars under management is no visionary leader. His 2018 ESG
letter was years late behind both the LGX exchange and the development of the EU taxonomy. A laggard at best. Fundamentally, Blackrock failed to initiate, develop, or market any of the emerging world wide climate finance instruments identified below:
GREEN BONDS OR CLIMATE BONDS?
A Green bond is a fixed income financial instrument (debt)
designed to support climate related or environmental projects. The green bond is also referred(AKA)to as a climate bond.
The green bond use’s green underwriting principals from the International Capital Market Association(ICMA)
. The climate bond uses green underwriting
guidelines from the climate bond standard. Proceeds from both bonds are used for: Positive impact on the planet, green, or sustainable purposes. All use of proceeds must be tracked and reported to bond holders how the proceeds were spent. Green bonds are an investment instrument to access finance and deliver green impacts against verified standards.Climate/green bonds are a new asset class. As of October 2020 over one TRILLION dollars of green bonds have been issued by: Sovereigns, corporations, International banks and governments.
In 2007 the first climate bond was issued by: European Investment Bank(EIB)
. In 2008 The World bank
issued the first green bond. The market has grown rapidly since the introduction of green bonds. It is estimated that a minimum of 12 trillion dollars will be required to move towards meeting the Paris climate
agreement initiated in 2016. Limiting greenhouse gas emissions to 1.5 degrees Celsius.UNEP
Mackenzie extrapolate: a climate bond is an extension of a green bond. Green bonds are issued to finance an environmental project. Climate bonds are issued to finance a reduction in emissions or climate change adaptation. Both bonds are theme bonds
, using accepted industry labels designed to: Allow institution capital to invest in politically important areas that have the same credit risk as standard bonds. Climate bonds allow governments to directly finance climate change
. Both bonds come with preferred tax incentives, tax exemptions or tax credits. This provides a financial monetary incentive to address social issues such as climate change. Which will be the centerpiece of the recently elected green president Biden Administration nationally rolling out net zero 2050 plan
. 29 years way!Climate bonds are asset backed, with a fixed or variable rate over a designated time frame.(ie:10 Years). With all use of proceeds committed towards a specific climate asset or designated program. Climate bonds finance: climate change adaptation or mitigation which may include: greenhouse gas emissions, energy efficiency, clean energy, climate adaption programs. or rising sea level
WHAT ARE ESG BONDS?
Environmental, social, governance fixed income financial instrument(ESGbonds.com
). ESG bonds
include: social bonds, green bonds, and sustainable development bonds(SDB)
. ESG bonds incorporate emerging developmental ESGunderwriting.com
guidelines from the Davis world economic
forum. ESG guidelines state: ESG bond use of proceeds are used to support projects that incorporate ESG analysis, ESGscores.com
from rating agencies, ESG metrics
can identify mitigating downside risk rather that upside potential. ESG scores can identify new credit risks not incorporated into traditional greenunderwriting.com
The higher the ESG score the better credit rating. The lower the ESG score the more chance of bond default. There is now direct evidence that a company’s ESG credentials
have a direct correlation on a company’s ability to repay their debt.There has now been identified, 21 fundamental non financial ESG core metrics
, and 34 secondary ESGcoremetrics.com
for relevant individual industries. Each metric focuses on: People, planet, prosperity and governance. This allows transparency, clarity and comparable disclosures between industries non financial
data. Standardization of non financial
information results in comparability and data consistency.One example could be the environmental pillar. The “E” pillar
carries carbon transition risks which will be accounted for among financial institutions annual sustainability reports. Soon to be mandatory disclosure. Unforeseen Government regulation: SEC ESG regulation, carbon tax, carbon emissions financially devalue a traditional 30 year “brown mortgage”
. Eventually leading to government requiring higher capital reserves from financial institutions. Brownmortgages.com
now have a documented higher risk of default, which can now be quantified on a balance sheet or display in a risk adjusted
transparent market. Fannie Mae
behind the curve selling their green MBS securities completely fail to quantify brown mortgage emissions credit risk or sea level rise
in their current underwriting. Therefore Fannie Mae is no leader, and investors should execute caution, despite what their press releases state. It was the taxpayer who lost 10 million homes to mortgage default, forced to abandoned their family dogs to die inside foreclosed homes, and unwillingly refinanced the 2008 financial crisis under treasury secretary Henry Paulson
. Who personally evaluated and prioritized systematic financial risk over the individual tax payer.ESGunderwriting.com
integration allows to more accurately price the bonds risk of default over a longer period of timed. The longer the bond maturity date the more ESG factors and creditworthiness risk expands over time. ESG underwriting
adds a holistic long term perspective adding a unique opportunity to identify previous unquantifiable non financial risks allowing investors to coordinate their sustainable capital investments with positive change.ESG bonds in Europe
grew 58% from 245 million in 2019 to 389 million in 2020. Compromising 8% of the total European bond issues. ESGbond.com
spreads were 5 basis points more than traditional brown bond spreads. Clearly documenting a green premium. The top ESG bond issuers were: Germany, France and Luxembourg, home of the LGX green
exchange. The EU emissions trading system (EUETS)
the largest emissions trading platform globally with 33 billion US dollars and 2249 metric tons of greenhouse gas traded annually. With the cost increasing 21% from 24.00 per metric ton in 2019 to 30.00 per metric ton in December 2020. Therefore climate change is now quantified and priced into world markets their is no more climate denial. Climate change is no longer a “HOAX”
it is a financial liability which ever American taxpayer will soon be paying for.The United States a perennial laggard, out in left field, with the largest 2021 stock market bubble in history. A sleep at the wheel ramming a 1.9 trillion dollar stimulus down American taxpayers throats has just created a 22 member SEC Climate and ESG task force
to identify misconduct, greenwashing and to over see corporate disclosure and compliance of climate risks. Therefore a financial market correction
is in the near future.
WHAT ARE TRANSITION BONDS?
Green bonds are for green industries. However when a “brown” industry
( Oil, mining, chemicals, shipping) needs to raise capital they cannot use a green bond(Greenwashing). A brown company is moving from “brown” towards “green” compliance. Usually over a period of multiple years. The financial tool designed and targeted for brown issuers will be transition bonds
. Specifically designed to finance brown industries
( heavy Co2 gas emissions). Transitionbonds.com
are a new asset class, specifically a new sustainable debt instrument.
Complementary to green bonds.With only 16 bonds issued to date. The first three(3) bonds were: A beef company, oil company and a utility company. UK Cadent gas initial 500 million Euro transition bond was over 8 times oversubscribed! Transition bonds will outgrow green bonds by 2025. Transition bonds underwriting criteria is still in early development. Their are no universally accepted guidelines. The International capital market association(ICMA) has published the framework for transition strategies. Transitionbonds.com use of proceeds will be documented in the bonds covenants. Transparency for use of proceeds will be mandatory. The issuer will incorporate science based targets with a planned transaction trajectory which will be quantified.(Specific target on specific dates). The London stock exchange has added a transition bond segment to its sustainable bond market.
To align with the Paris Agreement target of 2 degrees
Celsius under the EU taxonomy
, which will be government enforced starting in 2022. Nations will have to reduce their greenhouse gas emissions by 7.6% between 2020 and 2030. Triple the current target! Reducing greenhouse gas
emissions mitigation will be the focus for the entire decade. Transition bonds will allow brown industries to raise capital using issuer transparency, ESG scores,
or set specific goals under a designated time frame. One example could be a utility company reducing its Co2 emissions by 30% over a 15 year period. Interest rate coupons
could be set a 5 year intervals, demonstrating to sustainable investors the transition is valid and greenhouse gases are being reduced under the 15 year transition bond maturity date. Therefore the issuing utility company is in full transparency compliance with the transitionbond.com
can be used to finance: Sustainable development Goals(SDG)
, Biodiversity, improve a companies supply line, improve employee working conditions, improve social and governance standards etc. Transition bonds
can be powerful, imbedding sustainability into a brown company’s strategy, instead of a single specific transaction designed in a green bond. Brown companies will continue to operate while they are in transition from brown to green compliance.Brown companies
will come under increased government regulations to be in compliance with adapting to climate change, reduce carbon emissions, be in compliance with the EU taxonomy, United States SEC ESG task force regulations, and the Paris agreement. Failure to be in green compliance will eliminate, or raise the cost of capital. Coal companies worldwide cannot find insurance
and financing. Oil companies, oil shale extraction, and the Keystone pipeline
are now facing the same dilemma. Climate change is now REAL
and climate deniers will now be financially penalized
, its that simple. There is no discussion period! As Environmental, social and governance (ESG) which was a pipe dream, developed outside of the United States, now moves from a reluctant boardroom to sophisticated investment strategy
WHAT ARE KPI BONDS?
Sustainability linked bonds,(SLB) aka, KPI bonds
are forward looking performance based debt instruments with predetermined internal or external key performance indicators(KPI). Designed for issuers that do not have an advanced ESG profile, Key performance indicators are preselected and relevant to to issuer. KPI’s can range from one to five or more indicators designed to track the issuers progress over the bonds maturity. The selected KPI’s
are relevant, core and material to the issuer, quantifiable or measurable, internally or externally verified, and able to be benchmark(compared) to the issuer’s industry. There are no “good” or “bad” KPI’s. KPI’s are selected by the issuer, material to the issuer and their respective industry. Example of KPI’s can be: carbon emissions reductions, achieve a predetermined external sustainability rating
/metric, or increase the issuers renewable energy over a selected time period. KPI’s provide transparency from the issuer.The International Capital Market Association(ICMA)
has released ESGunderwriting.com
guidelines for the nascent emerging KPI bond market. KPIbonds.com use of proceeds are used for general corporate purposes. KPI bonds differ from green bonds as their use of proceeds are used for a specific purpose. Designed to Compliment the green bond market. KPI bonds shift the bonds focus from a specific project to allowing an issuer to implement a sustainable strategy while accessing performance based sustainable finance. This eliminates greenwashing claims, allowing a future foreseeable sustainable target be identified. and achieved under a designated time frame.KPIbonds.com
provide the issuer a financial incentive when the selected KPI is meet under the bonds maturity date. During issuer negotiations of the initial ESGunderwriting.com
covenants, The issuer agrees to predetermined selected KPI’s. When the KPI is meet the coupon of the KPI bond
is lowered. Conversely when a KPI is not meet the coupon increases, Usually within the range from .25 basis points up to .75 basis points. A small amount, however on a 500 million dollar bond this interest rate fluctuation is millions of dollars. Failure to meet a specific KPI does not trigger a bond default, only the coupon rate is effected, up or down. Investors now have external transparency from a KPI bond issuer, allowing their investments in green finance
to be targeted, disclosed, and monitored.Initially confused on how to package KPI’s into a new financial instrument, Of course innovative finance occurred outside the United States which is a perennially laggard. A greedy inept Wall Street focusing on a quarter to quarter corporations reporting basis. Allowing such CEO’s as Jamie Dimon
from J.P. Morgan to flourish despite billions of dollars in fines for greedy corporate
behavior. Focusing on accumulating assets for Morgan instead of a world wide ESG industry developing without the United States or Wall Street.It was Italian utility Enel
who issued the first KPIbond.com
in 2019. For 1.5 billion dollars, 5 year bond, 2.65% coupon. The simple one KPI was if Enel increased it’s renewable energy from 46% to 55% by December 2021. The one time verification was by Ernest and Young(EY). If the 55% KPI had not been achieved there was a 25 basis point increase in the coupon rate. Absolutely nothing to do with traditional Wall street financial reporting/disclosure. Now the United States is behind Europe and the green taxonomy
, approved, ratified and going into effect in December 2021. Wall street
was no where to be found. In quick succession was: Novartis, H&M fashion retailer with three KPI’s all outside the United States. Huge sustainable investor interest ensued. All KPIbonds.com
issued to date have coupon step up interest rate increases if the selected KPI’s are not meet.
WHAT ARE ESG STOCKS?
are tradeable equity instruments. A single share of a common stock
represents a fractional ownership of the company entitling the shareholder to a fraction of the company’s future earnings. In the event of bankruptcy a shareholder is only entitled to the residual interest after all other creditor obligations have been paid.ESG stock
investors use positive/negative screening to exclude companies or services involved in controversial industries, tobacco, firearm’s and gambling. ESG investors evaluate a company’s performance using three non financial screens. “E” for Environment which includes: climate change, Co2 emissions, and carbon footprint. “S” for social
, investors will focus and evaluate the company’s relationship with society. Employees, diversity, ethical supply chain sourcing. “G” is for governance
. Investors focus on how the company is run. Transparency, board of directors, shareholder rights and ethics.There is no ESG industry standard from the SEC, specific designated metrics, or securities ESG underwriting,
All are currently under development. Therefore ESG investors and ESGbrokers.com
have broad discretion in how ESG factors
are selected and applied towards stock selection, ETF’s, and mutual funds. Know your customer is the primary fiduciary obligation in front of a brokers commissions. Investors seek to match their investment goals, risk tolerance and individual preferences. ESG stock selection focusing on non financial factors off the balance sheet mitigates downside risk.
WHAT IS AN ESG LOAN?
Sustainability linked loans (SLL) aka ESG loan
. Usually arranged by syndicate of banks, a sustainability coordinator, An ESG underwriter.com
will be appointed to represent the syndicate to issue an Environmental, Social, Governance(ESG) loan commitment, which is a performance based loan. The borrower meets with an ESGbroker.com
to discuss, select, and identify Key performance indicators(KPI). When the selected KPI is meet the cost of the interest on ESG loan goes down. If a key KPI is not meet the cost of the ESGloan.com
interest goes up. Usually .25 to .75 basis points payable over a designated loan term. Typically One to Five years.There is no standard ESG loan underwriting
, A nascent market with each syndicate having its own unique ESGunderwriting.com
criteria and individual policies. Achieving each selected KPI indicator offers the borrower a reduced interest rate, transparency, an opportunity to achieve an individual selected goal. KPI’s apply for the life of the loan. Pre agreed KPI’s can be internal, board diversity, low carbon emissions, healthy living, ESG metric, or external ESG metric. (Paris agreement
proceeds are used for general corporate purposes, facilitating a corporation to initiate/expand a a sustainable strategy.KPI’s should be reported on periodically, and third party verified, As awareness of ESGrisks.com
increase there is now developing nascent emerging ESGunderwriting.com
link between credit spreads and overall default risk. The ESG loan is an emerging market financial instrument with Africa and the Middle east representing over 27 billion 70% of the market. United States represents a paltry 7 billion annually. In 2017 the first ESG loan was issued by ING group to Phillips
. The one billion dollar ESG loan was linked to Phillips sustainability rating by third party Sustainalytics.
is a corporations commitment to customers and shareholders towards sustainable growth and financial market transparency.The Loan Market Association(LMA),
Asia Pacific Loan Market Association(APLMA),
have launched loans tied to sustainability performance for environmentally friendly borrowers. ESG Loans
build/expand on the Green loan principals
are similar to green loans as the use of proceeds are not commitment to defined green projects and are used for general corporate purposes.As investors, corporations, and governments seek to achieve mandated ESG criteria. ESGbrokers.com
will evaluate the investors criteria, and select the appropriate financial instrument to facilitate, implement, and achieve their ESG goals. As ESG preferences are tailored to individual account holders, a customer centric approach will be required for each selected climate finance instrument. ESG brokers will implement custom processes to comply with “know your customer” rule as mandated government regulation is enacted world wide. ESGbrokers.com
will leverage multiple qualitative and quantitative ESG data as a holistic actively managed
investment strategy producing above market financial returns.