@aaronmgdr that definitely is an important consideration, thank you for adding that. One thing to consider with a cash-flowing real world asset (e.g., debt into a solar project) is that there likely also will be off-chain institutions willing to acquire those cashflows. That might create a couple extra steps, but the appetite for contracted cashflows is generally high off-chain.
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Hi @Muntangled,
We agree that ‘risk adjusted return’ is more wordy than “Yield”, but sometimes brevity leaves behind important nuances. Our concern with “Yield”, and the discussion of the relationship between price and yield, is that it can often create a perception that investment opportunities are limited to bond-type instruments or ABS transactions. There are typically many public comparisons for those types of transactions, but unfortunately those public market comps are not useful to evaluate the many other investment types that could be available to Celo. For example, sr. project debt, corporate/project mezzanine debt, corporate/project equity, and others don’t often lend themselves to public comps.
To avoid the confusion that can come from “Yield”, we like using “Return” as a third metric, as that allows for a nuanced assessment about investment type, risk, environmental impact, macroeconomic effects of a lower/higher rate environment, etc. We do feel it most important that the assessment of individual opportunities is based on a Celo-driven and Celo-specific view of different investments and project types based on their desired outcomes and priorities. We can prepare some thoughts on this and share.
Thank you again for starting this really important topic.
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This is an interesting breakdown of potential asset classes to support the cStables reserve.
But what seems to be missing from the table, however, is a discussion of the overall legal and contractual framework to support each asset class. On their own, none of these assets independently exist without a robust contractual framework. And within that contractual framework, there are multitudes of issues to be identified and risks to be mitigated.
For instance, solar and wind energy “yieldcos” and “operating renewable energy projects” require an analysis of the underlying power purchase agreements to understand whether the projects have long-term sustainable revenue.
For renewable energy construction loans in developing markets, there exist a plethora of issues in terms of timing (has the project completed all of the pre-development work (permits, land acquisition, etc.?), risk allocation (who is the contractor, what guarantees has the contractor provided to ensure project completion, what risks are there of import restrictions), and take-out financing (is there long-term financing?).
Natural assets such as REDD+ nature schemes have their own particular set of issues. For instance, does the nature based scheme contemplate restoration (planting mangroves) opposed to conservation? If the project is restoration based, what is the timing for the generation of carbon credits? Even fast-growing mangroves take several years to produce carbon credits. Does the project developer have assurances on land use and rights to affirmatively exclude local communities from using the land (the carbon credits vs farming/animal grazing tension)?
Impact, Liquidity and Yield are a good start in identifying attributes for “green” assets, but there are likely to be other equally important (perhaps more impactful) attributes to consider for the purpose of the cStable reserve. These include:
- Term of exposure (short, medium or long / development and operation)
- Development complexity
- Technical complexity
- Operational and execution complexity
- Legal regime
- Political risk
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@christiancdpetersen All the points you brought up are valid in assessing individual asset/project. Our post focuses on asset classes, particularly their potential suitability for cStables reserves. As this is a contribution towards creating a framework, we focused on outcomes rather than processes. You could have a perfectly sound REDD+ nature scheme i.e. all potential risks identified and dealt with but it may not be a good asset for cStable reserve at certain times due to its, say, lack of liquidity inherent in the asset class. If REDD+ asset class is to be included then issues such as timing of carbon credits will become relevant in assessing yield (or risk adjusted return profile) and impact (any greenwashing?). Both processes and outcomes are important but one is means and the other is ends. Risk points could be considered as part of the asset onboarding process Discussion & initial proposal: Reserve asset onboarding process.
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I understand, but I do not believe that you can separate the outcome from the execution. Otherwise, the community will choose an “end” without understanding the challenges to achieve that end. Thereafter, there will be frustration because execution “is taking too long”. The end and the means are complementary.
@christiancdpetersen Many of your points have already been covered in the above, separate post which deals with the means/process.