ESG & Institutional Investment
Part 8
Henrique C. Martins
ICMA’s Principles
ICMA: International Capital Market Association link.
Works to promote the development of the international capital and securities markets, pioneering the rules, principles and recommendations which have laid the foundations for their successful operation.
The Principles are a collection of voluntary frameworks with the stated mission and vision of promoting the role that global debt capital markets can play in financing progress towards environmental and social sustainability.
Green bonds principles
Definition: Green Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP
Green bonds are equivalent to other fixed income securities, both taxable and tax-exempt, except that these types of bonds or other similar debt instruments raise funds specifically to finance new and existing projects with environmental benefits.
Green bonds enable capital-raising and investment for new and existing projects with environmental benefits.
The Green Bond Principles (GBP) seek to support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment
- best practices when issuing bonds serving social and/or environmental purposes
- promote transparency and disclosure
Examples of green projects
- Renewable energy
- Energy efficiency (such as in new and refurbished buildings, energy storage, etc.);
- Pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, etc.);
- Environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture, etc.)
- Terrestrial and aquatic biodiversity conservation
- Clean transportation
- Sustainable water and wastewater management
- Climate change adaptation: (including efforts to make infrastructure more resilient to impacts of climate change)
- Green Buildings
Green bonds principles
The four core components for alignment with the GBP are:
- Use of Proceeds: describes the utilization of the proceeds of the bond for eligible Green Projects.
- Process for Project Evaluation and Selection: communicate the goals of the project and how the project fits within GBP.
- Management of Proceeds: create processes to make sure the proceeds are used in the project described.
- Reporting: demand full transparency with up to date information.
Social Bond Principles (SBP)
Examples
- Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)
- Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)
- Affordable housing
- Employment generation, and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises
- Food security and sustainable food systems
- Socioeconomic advancement and empowerment
Social bonds principles
The four core components for alignment with the SBP are:
- Use of Proceeds: describes the utilization of the proceeds of the bond .
- Process for Project Evaluation and Selection: communicate the goals of the project and how the project fits within SBP.
- Management of Proceeds: create processes to make sure the proceeds are used in the project described.
- Reporting: demand full transparency with up to date information.
Equator principles link
The Equator Principles (EP) are intended to serve as a common baseline and risk management framework for financial institutions to identify, assess and manage environmental and social risks when financing Projects.
The Equator Principles apply globally and to all industry sectors.
The Equator Principles apply to several types of financial products
Project Finance: is a method of financing in which the lender looks primarily to the revenues generated by a Project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure
Equator principles link
Principle 1: Review and Categorisation
When a Project is proposed for financing, the EPFI will categorise the Project:
Category A – Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented;
Category B – Projects with potential limited adverse environmental and social risks and/or impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and
Category C – Projects with minimal or no adverse environmental and social risks and/or impacts.
Equator principles link
Principle 2: Environmental and Social Assessment
The EPFI will require the client to conduct an appropriate Assessment process to address, to the EPFI’s satisfaction, the relevant environmental and social risks and scale of impacts of the proposed Project.
One or more specialised studies may also need to be undertaken
The client is expected to include assessments of potential adverse Human Rights impacts and climate change risks.
Equator principles link
Principle 3: Applicable Environmental and Social Standards
The Assessment process should, in the first instance, address compliance with relevant host country laws, regulations and permits that pertain to environmental and social issues.
Principle 4: Environmental and Social Management System and Equator Principles Action Plan
For all Category A and Category B Projects6 the EPFI will require the client to develop and / or maintain an Environmental and Social Management System (ESMS).
Equator principles link
Principle 5: Stakeholder Engagement
For all Category A and Category B Projects the EPFI will require the client to demonstrate effective Stakeholder Engagement, as an ongoing process in a structured and culturally appropriate manner, with Affected Communities, Workers and, where relevant, Other Stakeholders.
The client will take account of, and document, the results of the Stakeholder Engagement process, including any actions agreed resulting from such process.
Principle 6: Grievance Mechanism
For all Category A and, as appropriate, Category B Projects, the EPFI will require the client, as part of the ESMS, to establish effective grievance mechanisms which are designed for use by Affected Communities and Workers, as appropriate, to receive and facilitate resolution of concerns and grievances about the Project’s environmental and social performance.
Equator principles link
Principle 7: Independent Review
For all Category A and, as appropriate, Category B Projects, an Independent Environmental and Social Consultant, will carry out an Independent Review of the Assessment process
Principle 8: Covenants
For all Projects, where a client is not in compliance with its environmental and social covenants, the EPFI will work with the client on remedial actions to bring the Project back into compliance.
If the client fails to re-establish compliance within an agreed grace period, the EPFI reserves the right to exercise remedies, including calling an event of default, as considered appropriate.
Equator principles link
Principle 9: Independent Monitoring and Reporting
For all Category A and, as appropriate, Category B Projects, in order to assess Project compliance with the Equator Principles after Financial Close and over the life of the loan, the EPFI will require independent monitoring and reporting.
Principle 10: Reporting and Transparency
The client will ensure that, at a minimum, a summary of the ESIA is accessible and available online.
The client will report publicly, on an annual basis, GHG emission levels during the operational phase for Projects emitting over 100,000 tonnes of CO2 equivalent annually.
Final Exam/Case
September 14th
Quiz #4:
This is an individual task.
Principles:
- In your opinion, do the three companies qualify for issuing green bonds? And social bonds?
- Have they issued such bonds?
Final Exam/Case
September 17th & September 21th
The following Assignment questions are to be answered in groups of 3.
Previous quizzes
Combine the group’s answers for quiz #3 and #4.
You can change the answers if you like
Final Exam/Case
September 17th & September 21th
The following Assignment questions are to be answered in groups of 3.
- background questions:
- What are the motivations behind ESG investing?
- How serious do you think the financial sector is about integrating ESG issues in investment decisions across various asset classes? Contextualize your answer.
- What is “impact investing”? Give 2 examples of impact investing.
Final Exam/Case
September 17th & September 21th
The following Assignment questions are to be answered in groups of 3.
- Investment decision:
- Would you recommend that Triodos invests in Yamaha, Tesla, and PMI (without reservations, or engaging on the controversial issues)? Why?
- Examine one main competitor of each main case company and compare their ESG disclosure using the information contained on the company’s website.
Final Exam/Case
September 17th & September 21th
The following Assignment questions are to be answered in groups of 3.
- Pitch
- Each group must create a slide presentation with the main recommendations about the three firms.
- Remember, the underlying idea in the case is to select analysts to work at Triodos.
- You need sounding arguments, preferably using numbers or projections of ESG-related issues.
- Record a video or a PPT presentation with audio “presenting” the slides.
I hope you like this class!
Find me at:
https://eaesp.fgv.br/en/people/henrique-castro-martins
https://www.linkedin.com/in/henriquecastror/
Social Bond Principles (SBP)
Social Bonds are any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects and which are aligned with the four core components of the SBP