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THE SIMPLE SOCIAL AND GREEN BOND- THE SOCIAL AND GREEN IMPACT BOND
(the next lecture we will focus on the function of the impact bond, but nevertheless today we will see the main features of them). So, generally speaking we have sustainable bonds which features have been defined previous. In this big umbrella of sustainable bonds we can distinguish 2 other main typologies of sustainable bonds. What is the main difference between simple social-green bonds and impact bonds?
PERFORMANCE: if you look at this slide you can just focus on the main distinguishing feature!
SOCIAL/GREEN IMPACT BOND: they are structured and they follow what we in literature define as pay by result mechanism. What do we mean by pay by result mechanism? We mean the conception that the investors in the instrument (in that case the social or impact bond) are open to receive a financial return which is related to the impact achieved (social impact if it is a social impact bond, or a green impact if it is a green impact bond).
this means that investors don't receive a predetermined financial return but they receive a financial return in relation to the impact generated by the investment financed by the funding originated by the bond's issue. Quindi, questo un punto cruciale -> stiamo entrando nello specifico nei sustainable bonds e non più nella definizione generale -> infatti vediamo social/green bonds semplici e quelli impact. Quelli IMPACT -> riportano dentro tutti quei concetti visti nella finanza d'impatto, e quindi sono strumenti della finanza d'impatto perché si basano sull'idea dell'IMPACT FIRST, poi associano a questa idea un meccanismo di remunerazione degli investitori che è tipico della finanza d'impatto (pay by result), cioè gli investitori non vengono remunerati in modo predeterminato in base ai classici driver rischio rendimento, bensì ottengono una remunerazione che tiene conto del rischio rendimento ma soprattutto.dell'impatto raggiunto, e quindi: + impatto = +rendimento!So pay by result means that in order to define the level of remuneration for investors I don't only look at the return related to the risk (which is the traditional approach in finance) but also I look at the impact (more impact = higher return).
- SIMPLE SOCIAL/GREEN BOND: in this case we may realize they are usually below the market rate, so they offer an interest rate below the market rate or they are issued at the market rate.
So, the investors of simple social/green bond don't usually have expectations in terms of return that is higher than the market level.
Mentre nei bond ad impatto abbiamo una struttura finanziaria impostata sul pay by result secondo la quale la remunerazione degli investitori non solo guarda al rischio-rendimento dei progetti ma guarda soprattutto all'impatto che è fondamentale per definire il livello di ritorno per l'investitore... Invece, nel perimetro dei
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semplici social/green bond (semplici è un'etichetta per distinguerli dagli impact bond, ma comunque hanno una struttura finanziaria più complessa dei bond tradizionali) - la remunerazione è below o al max al livello del market rate, cioè gli investitori in essi hanno aspettative di ritorno più o meno al livello del mercato (sotto o al max al livello), poi ovviamente c'è una regola, una legge o una prescrizione normativa, ma è la prassi di mercato che ce lo dice - laddove gli stessi emittenti procedono all'emissione dei simple, prezzano il bond emesso come se fosse un bond normale, e quindi non si distinguono troppo da quelli tradizionali e possono avere un livello di remunerazione in linea con essi.
Poi ci sono anche emittenti che provano a fare operazioni di tipo più sostenibile intercettando investitori più interessati all'impatto ambientale e sociale, e quindi sono disposti anche ad avere una remunerazione al di sotto del market rate.
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Of course, you may have other distinguishing features that allow you to distinguish between the social impact bond and simple social-green bond, but these are not the rules, but rather what the market usually tells us.
PROMOTER
It's very common for social-green impact bonds to have public body promoters. They are much more likely to be issued by public bodies and public entities, while social-green bonds can be issued by both public and institutional entities.
A social-green impact bond does not involve the issuance of any bond, while social and green bonds are traditional bonds. So you can see that it is a traditional issuance of bonds managed by a financial intermediary.
Attenzione! In the typical structure of social or green impact bonds, there is usually no issuance of a bond. So if you ask why they are called impact bonds, the professor cannot give an answer because he doesn't know, but they are called that and that's it. (Maybe on Monday he will have an answer.)
capiremo).INVESTORS:
- Investors of green impact bond are generally institutional or private.
- While social and green bonds can be sold not only to institutional but also to retail customers.
FINANCIAL STRUCTURE:
- IMPACT BONDS are structured finance actually.
- While SOCIAL-GREEN SIMPLE BONDS are traditional bonds.
PERFORMANCE: we have already explained this variable.
RISK AND MEASUREMENT:
- RISK: when we are talking about social-green bond we are in front of a traditional bond which means that this is a debt based financing (so anything we know about the traditional bonds also refers to the social and green bonds).
- While in the impact bond there is the traditional scheme of blended finance with different categories of investors sharing differently the credit risk underlying in the bond.
- MEASUREMENT: of what? Of the impact because both the kind of bond (simple and impact) look at impact, whatever green-environmental or social, but there is a difference because impact bond usually.adoptato, ma deve andare oltre e misurare l'effetto reale che l'azione ha avuto sull'obiettivo desiderato.erogato→ perché in tal caso sto legando la performance dell'investitore ad una performance d'impatto e, ovviamente, il numero di microcrediti non mi dice molto sull'impatto sociale, e quindi devo andare a fare un'analisi approfondita per studiare la fase di misurazione dell'impatto→ e questa è una differenza tra gli impact ed i simple bond→ anche se comunque non c'è nessuna regola per cui un social o un green bond simple potrebbe adottare benissimo un output based model per la misurazione→ ma attualmente il mercato ci dice quello che leggiamo in tabella e, se vogliamo dirla tutta, è anche la direzione dove porta la regolamentazione, soprattutto la regolamentazione europea perché la tassonomia è legata a dei KPIs che sono tipicamente output based. And now we have a look at this slide→ in which we can read a more detailed taxonomy within the social and green bonds (SIMPLE). In the category of SIMPLE SOCIAL AND GREEN BONDS we
can distinguish a lot of sub-categories of bonds. The actual slide and the next one are the same but the difference is simple in the goal of the kind of bonds.
4 KINDS OF BONDS:
- STANDARD SOCIAL or GREEN USE OF PROCEEDS BOND - read the slide - tell us what? We have a traditional bond which includes a debt obligation of the issuer, we have a bond which aligned the bond principles and we have a bond in which u may have standard recourse to the issue - which means that the investors are buying a traditional bond but a bond aligned with the bond principle (social or green bonds principles). I know that there is use of proceeds which refers to the bond principles but I also know that is a bond so there I can make a standard recourse to the issuer if something is going wrong.
- SOCIAL or GREEN REVENUE BOND - is a bond but here what I know is that I have use of proceeds and, as an investor, I'm sure that all or part of the proceeds are related to the social or green project.
proceeds go to related or unrelated social - green projects, so I know that all or part of the proceeds are associated to social projects. But I know because it's a social revenue bond I know that my risk exposure is restricted to the revenues streams, which means that is restricted to the assets financed by the bond (while in the first kind = the standard social use of proceeds bond, I also could make standard recourse to the issuer in case of credit risk).
SOCIAL or GREEN PROJECT BOND: looking from the investor perspective, what I know? I know that this bond is a bond which is issued to finance a single or a multiple-basket projects, and all these projects are allowed with the bond principles and I know that my exposure is connected to the risk of the projects and the financial structure may provide or not potential recourse to the issue.
SOCIAL or GREEN SECURITISED AND COVERED BOND: just think at the ABS securitization I have a sort of ABS which are aligned (allineati).
ue of the bonds are used for specific purposes that align with environmental or social goals. This could include financing renewable energy projects, supporting affordable housing initiatives, or funding clean water and sanitation projects. b) UNDERLYING ASSET refers to the asset or project that is being financed by the bond proceeds. This could be a solar power plant, a green building, or a social impact project like a community health center. c) AGGREGATION means that multiple underlying assets are grouped together to create a portfolio of projects that are financed by the bond. This allows for diversification and risk management. d) GREEN OR SOCIAL BOND PRINCIPLES are a set of guidelines and standards that define what qualifies as a green or social bond. These principles ensure transparency, accountability, and integrity in the issuance and use of proceeds from these bonds. e) COVER BOND STRUCTURE OR ABS STRUCTURE refers to the specific structure of the bond issuance. A cover bond structure means that the bond is backed by a pool of high-quality assets, providing additional security to investors. An ABS (Asset-Backed Security) structure means that the bond is backed by a specific pool of assets, such as mortgages or loans. While this taxonomy provides a framework for understanding sustainable bonds, it is important to note that financial innovation is constantly evolving. New types of bond issuances may emerge that do not fit neatly into these categories. However, this taxonomy serves as a useful tool for understanding the various dimensions of a sustainable bond and the standards that govern them.
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