Case Study Details - Playbook of Solutions

Description

Non-commercial and commercial hedging solutions can be mobilized to reduce the exposure to currency exchange rate fluctuation risks. These solutions include many different types of financial products, but higher risk and lower liquidity sometimes limit their availability in emerging or frontier markets. Green FX hedges, through a dedicated green hedge framework, support a company’s green bond framework by mitigating currency risk associated with green bond projects. This alignment enhances the company’s overall sustainability ambitions. Just like traditional FX hedges, green FX hedges help companies manage currency risk. However, they also align financial risk management with broader sustainability objectives.

Benefits

Managing currency risk is a significant challenge for project developers and is often beyond the control of government agencies responsible for infrastructure development. It poses a significant threat to project financiers, as currency fluctuations can jeopardize the ability to service debt or impact profitability.

The price and availability of hedging solutions in frontier markets can therefore have a significant impact on the financial viability of projects. By transferring currency risk from borrowers to the hedging entity, operationally hedging a transaction, or taking advantage of MDB financing conditions, these solutions increase the transparency and efficiency of development finance.

Case Study

Deutsche Bank executes world’s first green hedge backed by second party opinion to finance clean energy in India

In 2021, Deutsche Bank executed the world’s first green Foreign Exchange (FX) hedge, linked to a USD 561 million green bond issued by Continuum Green Energy Limited, a renewable energy group based in India. This hedge with notional of USD 185 million, developed under a specially designed Green Hedge Framework, aimed to manage the currency risk associated with Continuum's USD-denominated green bond proceeds. The FX forward, tied directly to the bond issuance, covered the conversion between Indian Rupees (INR), the currency of project revenues, and USD, the currency of bond interest and principal payments, thereby mitigating exchange rate risks over the 6-year tenor of the hedge.

What made this transaction particularly innovative was its adherence to high standards of sustainability: both the Green Bond and the Green Hedge Framework received a Second Party Opinion from CICERO Shades of Green, which verified that the hedge met green financing standards. This framework also provided enhanced transparency for investors, as it aligned financial risk management with the environmental impact of the underlying green projects, such as wind and solar power developments in India. By using proceeds from the green bond to cover hedging costs, Continuum ensured that both the bond and hedge supported its renewable energy expansion, making this a pioneering approach to integrating FX risk management with green finance in emerging markets. This transaction also facilitated access to international pockets of funding reducing the investment risk and ensured long-term sustainability of the project enabling Continuum to manage the key risks of USD/INR volatility and implied depreciation over time.

Additional Sources

Green FX Hedging