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Green, Greener, Green Bond

An Overview of the Green Bond

Seminararbeit 2017 26 Seiten

BWL - Sonstiges

Leseprobe

Table of Contents

ABSTRACT

LIST OF ABBREVIATIONS

1. INTRODUCTION

2. AN OVERVIEW OF THE GREEN BOND
2.1. DEFINITION AND TYPES OF GREEN BONDS
2.2 GREEN BOND PRINCIPLES (GBP)
2.3 THE EVALUATION TOOLS FOR GREEN BOND

3. APPLE µS GREEN PROJECTS
3.1 DATA
3.2 APPLE GREEN PROJECTS
3.3 EVALUATION OF GREEN BOND AND COMPARISON WITH OTHER BONDS

4. CONCLUSIONS

REFERENCES

FIGURES AND TABLES

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Abstract

With the effects of climate change getting obvious in many places around the world, the need for financing green projects is urgent now more than ever. Under these circumstances, green bonds become a new investment instrument to attract capital for sustainability projects. However, the valuation for these assets is vague because it lacks consistency in green bond principles, standard tools and techniques for determining their value.

The purpose of this paper is to closely examine the Apple’s first green bond and its comparison to its corporate and US Treasuries bond, both of which have the same maturity. The green bond in this work is considered as normal corporate bond and is valued by using Present Value Technique.

Chapter 1 is a short introduction to the concept of green bonds which are further described in Chapter 2. Finally, in Chapter 3 the Apple green bond is studied and discussed.

KEY WORDS:

- Apple
- Green investment projects
- Green bond
- Bond evaluation
- Sustainable finance
- Present Value Technique

1. INTRODUCTION

Nowadays, we are facing globally a series of environmental issues due to climate change. These problems directly affect not only our daily life but also the society development. According to Nicolas Stern (2007), the cost of damage caused by climate change could be up to 20% of GDP or more if we did not act1. Considering the environmental impact, many countries heighten public awareness of environmental problems. Many leading companies worldwide have cut greenhouse emissions by using renewable energies, applying eco-friendly manufacturing process. In Paris Agreement 1995, 197 countries signed the contract to cut their greenhouse emissions so that the global temperature rise will remain below 2 degrees Celsius. In other words, the investment in green projects becomes a new trend in capital market. A new debt instrument, green bond, has been created to finance the green projects. Since the first issuance, the green bond market has grown rapidly. However, the development of green bonds in their financial market face many challenges because of the lack of a common standard and investment in those.

In this year, President Trump announced that the United States would withdraw from Climate Change Accord. However, his decision will not affect the environmental protection purposes of US Corporations. Many states and corporations from all over the country committed to abide by Paris Agreement 2015, despite the federal government’s withdrawal from Paris Climate pact. Apple is one of these corporations. In June 2017, it had issued the second green bonds, worth $1.5bn. This move came one year later, after Apple’s first bond issuance, which was worth $1bn2. It became the biggest green bonds offered by U.S corporation. As Apple reported, the revenue from the green bond issuance will be used to support the renewable energy programs, the energy efficiency for the firm’s buildings and the research of new and eco-friendly material for Apple products.

This paper contains two main parts. First, the fundamentals of green bond are explained, as well as the green bond assessment tool provided by the credit rating agencies, Moody and S&P. Second, an analysis is conducted considering three different bonds: Apple’s first Green Bond, Apple Corporate Bond and US Treasury Bond with the same maturity. To compare the attractiveness of those bonds, the Present Value Approach and focus on yield, duration and convexity of three bonds are used.

2. AN OVERVIEW OF THE GREEN BOND

2.1. DEFINITION AND TYPES OF GREEN BONDS

When talking about environmental protection projects, people normally think about solar energy or wind energy farm. Besides those, energy efficiency, low-carbon transport, sustainable agriculture and forestry, climate resilient infrastructure and climate adaption are also considered as green projects3. To finance the green projects, many governments, financial institutions and corporations currently separate the capital charges for environmental friendly projects into a sub-account or sub-portfolio. Initial costs for green projects are normally higher than other projects which leads to the lack of capital. Therefore, green bonds have become an important channel to raise funds for the green projects or projects related to environmental protection. A green bond is defined as a fixed-income security that attracts investments for sustainability projects. It can be issued by governments, commercial banks, financial institutions as well as corporations. At present, the green bond issuers are large financial institutions such as European Investment Bank (EIB), World Bank (WB).

According to Green Bond Principles (GBP), there are four types of Green Bonds:

1. Green “Use of Proceeds” Bond: This type of bond has recourse to the issuer. The proceeds from this green bond issuance will be credited to a sub-account. Then they will be transferred to a sub-portfolio or be observed by the issuer in accordance with the internal process. This process monitors the issuer’s loan as well as investment operations to finance the eligible projects4.
2. Green “Use of Proceeds” Revenue Bond: This bond has non-recourse to the issuer. Instead, the debt obligation linked to the issuance will have recourse based on cash flows of the revenue stream such as tax, fees... The proceeds from issuance may be used to finance related or non-related to green projects. They will be credited to a sub- account and will be entered to a sub-portfolio later. The issuer will monitor the use of proceeds internally. Basically, this type of bond is alike normal bonds, but is associated with environmental protection. For this kind of bond, the issuer shall inform investors the temporary use of unallocated proceeds.5
3. Green Project Bond: The issuance to raise fund for a single or multiple green project. The investors are aware and bear of the project risk. This bond shall have recourse or non-recourse6.
4. Green Securitized Bond: This type of bond is based on the collateralized assets, which are linked to green bond projects. It includes covered bond, ABS, MBS. The first repayment comes from the cash flow of green projects7.

2.2 GREEN BOND PRINCIPLES (GBP)

For standardizing the green bonds as well as developing the green bond market, a group of banks, coordinated to create the Green Bond Principles (GBP). The draft was firstly released in 2014 and is adjusted yearly in accordance with the development of green bond market. The latest draft published in June 2017 included some changes. The issuance of green bonds should be complied with four main components.

1. Use of Proceeds: The use of proceeds should be documented transparently and legally for the investors. If the proceeds are used to refinance, the refinanced projects should be clearly informed as well as their relevant information. For classifying the green projects precisely, the categories of eligible projects are listed. They include renewable energy, energy efficiency, biodiversity conservation, clean transportation, sustainable waste management, sustainable land utilization, sustainable water management, use of environmental friendly materials and manufacture, eco-friendly infrastructure and climate change adaption.8
2. Proceeds for Project Evaluation and Selection: The issuer should inform investors about the information related to his/her green projects. It includes the objectives of his/her green projects, the internal process to determine the compatibility of projects as well as the criteria linked to social and material environmental risks. In this component, the transparency is affirmed.
3. Management of Proceeds: The internal process is applied to track the use of proceeds, which is linked to finance the green projects. In case of the unallocated proceeds, the intended temporary investment shall be revealed to investors. The service of external review such as auditor is recommended to verify the transparency of management proceeds.
4. Reporting: the issuer should report to investors at least annually. In the report, it shall include the description of projects, amounts of disbursement, the expected impact of projects on the sustainability environment. The expected impact shall be measured by quantitative and qualitative indicators.

2.3 THE EVALUATION TOOLS FOR GREEN BOND

The first green bonds were issued in 2007 by European Investment Bank (EIB) to finance the renewable energy and energy efficiency program. Since then, green bond becomes the new debt instrument in the financial market and are expanding quite fast. However, investors face difficulty in assessing the credentials of green bond issuers. Understanding this difficulty, two credit rating agencies, S&P and Moody’s, developed methodologies to score the effectiveness of use and management of proceeds by green projects. According to their report, the methods are not the credit rating and cannot measure the environmental effect of projects.

The Green Bond Evaluation Methodology was introduced by Moody’s Investor Service in 2016. Under Moody’s methodology, the rating scales are ranging from GB1 (Excellent) to GB5 (Poor). The scale is based on five main factors with basic weights. These factors are Organization (15%), Use of Proceeds (40%), Disclosure on the Use of Proceeds (10%), Management of Proceeds (15%), Ongoing Reporting and Disclosure (20%). Each main factor includes sub-factors. The score of each main factor is calculated by the criteria satisfaction of its sub-factors. If all the criteria of sub-factors fulfill, this main factor will get score “1”. Score “5” means one or none sub-factor are satisfied. The sub-factors of five main factors are listed in tables 1 to 5 below. Each main factor multiples by its weight and then all factors are added together to make a composite weighted-factor score. Table 6 is the Green Bond Assessment Scorecard. Because the use of proceeds changes, the rating scale is updated based on the issuer’s reporting.9

S&P has developed its own methodology for assessing the green bond. To determine the score scales, S&P analyzed four main factors with their basic weights: Transparency (15%), Governance (25%), Mitigation and/or Adaption. The basic weights vary from 0 to 100 percentage.

[...]


1 N. Stern, Stern Review: The Economics of Climate Change, 2006

2 Bullock, N. (2017). Apple raises $1bn through „green bond” in environmental push. In Financial Times 1

3 Climate Bond Initiative, 2017. Green Bonds Methodology

4 ICMA, 2016. Green Bond Principles, 2016. Voluntary Process Guidelines for Issuing Green Bonds

5 ICMA, 2016. Green Bond Principles, 2016. Voluntary Process Guidelines for Issuing Green Bonds

6 ICMA, 2016. Green Bond Principles, 2016. Voluntary Process Guidelines for Issuing Green Bonds

7 ICMA, 2016. Green Bond Principles, 2016. Voluntary Process Guidelines for Issuing Green Bonds

8 ICMA, 2017. Green Bond Principles, 2017: Voluntary Process Guidelines for Issuing Green Bonds

9 Moody’s Investor Service. 2016. Moody’s “Green Bonds Assessment Methodology” (GBA)

Details

Seiten
26
Jahr
2017
ISBN (eBook)
9783668717794
ISBN (Buch)
9783668717800
Dateigröße
1.1 MB
Sprache
Englisch
Katalognummer
v427696
Institution / Hochschule
Brandenburgische Technische Universität Cottbus
Note
1.3
Schlagworte
Green bonds Apple Green investment projects Bond Evaluation

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Titel: Green, Greener, Green Bond