2021-06-28-KPMG_China-绿色债券是否包含嵌入衍生工具_3页_1mb

1. Question

Do green bonds contain embedded derivatives?

2. Issue

Green and sustainability-linked bonds are popular financing tools, often linked to ESG targets, but the question arises whether these bonds contain embedded derivatives requiring separation under IFRS 9.

3. Detailed Analysis

• Green Bonds: Focus on specific environmental funding; less likely to have complex payoffs.
• Sustainability-Linked Bonds: Proceeds can fund general corporate use, with explicit commitments to future sustainability improvements. Features often include variable coupon payments tied to achieving certain targets (e.g., a tire company committing to increasing recycled rubber content in tires).
• Embedded Derivative Assessment: An embedded derivative exists if the feature is:
  • Separable: Its economic substance differs from the host contract.
  • A Derivative: It meets the definition under IFRS 9.
  • Non-Fair Value Through Profit or Loss (FVTPL): The hybrid contract isn't measured at FVTPL.
• Application: A sustainability-linked bond with a variable coupon payment is assessed for separation. The variable underlying variable is non-financial and specific to the issuer, so it does not qualify as a derivative. Thus, the bond is classified as a financial liability measured at amortized cost.

4. Summary

• Sustainability-linked bonds may contain clauses affecting interest payments linked to targets.
• These clauses often do not qualify as derivatives under IFRS 9 because the underlying variable is non-financial and issuer-specific.
• Consequently, these bonds are generally classified as financial liabilities measured at amortized cost, not requiring bifurcation of the embedded feature.

5. Concluding Thoughts

Green bonds typically lack embedded derivatives. Sustainability-linked bonds may contain such features but generally do not meet the derivative definition under IFRS 9 due to their non-financial nature.