While 2019 was marked by an increasing awareness of the climate change emergency, 2020 will probably be the year of confirmation as global warming was making headlines in January, from the terrifying effect of forest fires in Australia to the inclusion of global warming for the first time on the agenda of the World Economic Forum in Davos.
A consequence for the finance industry is the strong growth of sustainable investing assets which currently stand at USD 30.7 trillion at end-2018 according to the Global Sustainable Investment Alliance. Green finance is, therefore, no longer the highly concentrated niche sector it used to be.
Another major transformation is the increasing range of green financial instruments from low-risk green bonds issued by governments to infrastructure debt to single stocks. Between bonds and equities, a relatively new asset class has emerged – the green note.
What is a green note?
A green note is similar to a standard structured note in many ways. It is a debt security, issued by a financial institution, where performance is linked to the return of an equity underlying, say an equity index, a basket of stocks or a single stock.
The major difference between a green note and a standard structured note is the use of the proceeds from the issued debt.
What about the underlyings?
A green note can be structured on a basket of stocks with a strong ESG rating for example (for Environment, Social and Governance criteria). For investors seeking a more diversified investment, green notes on ESG indices may provide an attractive solution.
A number of independent index providers such as MSCI or Solactive rank stocks according to ESG criteria and then offer diversified indices based on the ESG scores.
A green efficient portfolio
There are two main types of structured notes - a participation product and a high coupon product.
A participation product will provide, as its name indicates, an exposure to the performance of an underlying asset under a number of conditions while often offering some level of downside protection. A high coupon product is more similar to a bond as it pays a regular coupon with no upside participation but potentially with some form of protection.
Access to green notes offers investors a wider range of risk-return profiles and should therefore help them to improve the overall performance of their investment portfolio while investing in sustainable financial instruments. Lying between stocks and bonds, green notes are the missing piece to the green allocation puzzle.
February 17, 2020