Green bonds: hype or key to greening the future?

Green bonds are back in the news again in recent weeks following some big issues from Google and the German government.

You may be asking yourself: why should I care. Well, green bonds finance green stuff – infrastructure, transport, buildings – and mobilising huge sums of money to fund those projects is part of the big transition. Is this working? Well, the market has grown very fast. But it still only represents 2% of the entire bond market.

So the big question is whether the green bond market will continue to be a niche that finances the greenest bits of the economy, or whether it can go mainstream so that the bond market aligns with an economic transition that allows for well below 2C of warming.

To find out, I talked to Denise Odaro from the International Finance Corporation. She’s both a green bond expert and a pioneer of the green bond.

We talked about the origins of the green bond, what makes a bond green and whether that’s changed over the years, and, above all, what is the future of the green bond.


Denise Odaro heads investor relations globally for IFC. She joined IFC Treasury in 2012, establishing the the investor relations function to complement IFC’s $17 billion annual funding program. She is also responsible for the management of IFC’s sustainable bonds program.

Denise has been a central figure in the development of the sustainable bond market since IFC’s historic benchmark green bond in 2013. She was a founding member of the Green Bond Principles Executive Committee and subsequently chaired the Social Bonds Working Group from 2016-2020. For her efforts in promoting sustainable bonds, Denise was named “Personality of the Year” in 2020 by Environmental Finance Magazine.

Presently, Denise is the Chair of the Steering Committee of the Green, Social and Sustainability Linked Bond Principles, the most referenced framework globally for thematic bonds. Recently, the National Institute of Investor Relations honored Denise as one its “40 Under 40” accomplished professionals.

Prior to joining IFC, she was an underwriter in the energy division at MIGA, the World Bank Group’s political risk mitigation arm. Previously, Ms. Odaro worked for Lehman Brothers as a debt portfolio manager and on loan syndications and secondary loan markets at GE Capital and Goldman Sachs, respectively.

She holds an MBA from Cornell University and qualified as a Barrister at The Honourable Society of Lincoln’s Inn. Denise was also selected for the 2019 Emerging Leaders Program at the Kennedy School of Government.


Green bonds resources – International Finance Corporation

Climate business resources – International Finance Corporation


We’ve now I think about 12, if not more sovereigns that have issued green bonds. And so these are the largest bond issuers in the world, typically sovereigns. And as economies, begin to re-open post the COVID-19 crisis here is the opportunity in fact to commit to rebuilding infrastructure in a more sustainable way.

Welcome to episode 7 of New Climate Capitalism, and today I talk with Denise Odaro from the International Finance Corporation about green bonds.

Now green bonds took a back seat to social bonds during the first wave of the pandemic. But they’re back in the headlines with a couple of big issues recently from Google and the German government.

If you’ve ever wondered what green bonds are and why do they matter? Then this episode is for you.

The green bond market has grown super fast in the past decade. Yet it still only represents 2% of the entire bond market.

So the big question is whether the green bond market will continue to be a niche that finances the greenest bits of the economy, or whether it can go mainstream and allow the entire bond market to align itself with an economic transition that keeps us under 2C of warming.

Denise and I talked about where the green bond came from, what makes a bond green, and what is the future of the green bond market.

I think you’ll enjoy our conversation. There’s even a brief appearance by my cat, right in the middle of our discussion.

Denise O: Thank you very much for having me. I’m an avid podcast listener, so it’s always nice to contribute to the repository.

Denise: And of course, this is the first time I have had the privilege of interviewing someone with the same first name as me. So that’s also very exciting. 

Denise O: Indeed. 

Denise: To kick off, I have a confession to make. I’m a bit scared of green bonds in general. And quite scared of the bond. I’ve never really understood what is a bond. What is a coupon? What is the yield? Uh, it’s all slightly mysterious.So my goal for our conversation today is to feel like I have understood what a bond is, and what a green bond is. So that’s my first question. What is a bond?

Denise O: Well, I’ll say Denise, to begin with fret not because you are, you know, with 99.9% of the world’s population who also ask the same question or who do not know much about bonds.

So very simply a bond is a debt. Similar to a loan. And if you permit me, I’ll give a simplified high level description. So for all those listeners who are au fait with structured and complicated versions, this is not targeting you. You can cover your ears. 

Bonds are similar to loans. So first and foremost they’re mostly used by companies and governments to borrow money. Now in most cases, as we all know, with our own consumer loans or mortgages, with the loan as such, you borrow money from a bank or a single lender, but bonds allow companies and governments to borrow large, vast sums of money from the public.

And so in the same fashion, you have a debt amount and a repayment period. Now some of the main differences between loans and bonds. So say you borrowed a hundred dollars as a loan. You tend to pay back and repay portions of the loan along with interest over an agreed lifetime. With a bond, you only pay the interest, which is called a coupon and it’s usually a fixed percentage.

So you only pay the interest during the lifetime of the bond. And then you repay the original debt at the end of the term. And that works well for companies and large borrowers  because of the predictability of the debt repayments. And because of the large sizes of debt amounts raised, which are larger than loans, they tend to also be traded similar to how stock is traded.

So the original group of lenders may not be the lenders in the end. Now in my job, as you said, I head investor relations for IFC*. And for those who are not aware, IFC is a member of the World Bank Group, and we are the largest global development institution in the world, focused exclusively on the private sector in developing countries.

We are also one of the world’s largest financiers of climate smart projects. In my job, I manage the relationship between IFC and those who lend us money through our bond programme. Every year we borrow around $17 billion from the public, which we then use to provide loans to the private sector. And we raise this money through issuing bonds.

Last year, for example, we issued 300 bonds and these are usually bought by central banks, pension funds, asset managers, private banks, and so forth. And some of these bonds are green bonds.

* International Finance Corporation

Denise: I’ve always understood that bonds are all about hedging against risk, whereas shares are more about making a profit. If that’s correct, how does it actually work in terms of the bond? 

Denise O: So bonds are considered safer investments than stock. The reason being  because you’re not as exposed to the volatility of a company’s earnings, they have to pay their debt, whatever the case, unless they go bankrupt, which is complicated. And we can talk a little bit more about that should you wish. 

But by and large, as a company first and foremost, you pay your loans and your bonds, et cetera. And the last payment recipients in what is often referred to as a waterfall would be the equity holders.

And so for that reason, stock is so much more risky than bonds and this is the rationale behind pension funds and insurance companies, for example, and the central banks, being investors who have to primarily preserve capital by investing in the bond market. 

So dependent on your risk appetite, were you seeking high returns, you would focus on equity investments through the stock market. However, if you were seeking to preserve your capital long term, as in the case for pensions et cetera, then you would more than likely be focusing on the bond market.

Denise: Right. And so is the bond genuinely zero risk today? 

Denise O: No, I don’t believe as we taught in business school that any investment is zero risk. Bonds are generally not zero risk. You do have a range of credit for bond issuers. So in the case of most governments, you would have the highest credit rating in your country. And so in your particular country, you could be considered zero risk. Which is not necessarily zero risk if somebody from outside that country were investing in your bonds because their zero risk would be their country.*

And to illustrate that it would be, say you were an investor in England and you invested in the Nigerian government bond. Well, the Nigerian government bond is not zero risk for you, because your zero risk would be the UK government bond.

However, if you were a local investor in Nigeria, the Nigerian government bond would be your zero risk. 

* i.e. Their country’s government debt

Denise: So let’s move now to the green bond. Could you explain what a green bond is and how is it different from a garden variety bond?

Denise O: Right. So, some of the investors out there who I think I gave an illustration as to, the kinds of companies that buy bonds. So central banks, pension funds, asset managers, commercial banks, et cetera. Some of these investors who lend money to companies and governments, a while ago began adding conditions to these investments of theirs.

And this practice had long existed where, you know, buying stock one could exclude certain kinds of companies from one’s investment lists. Good examples of these being tobacco, gambling companies, et cetera. So if you were an investment manager*, you would exclude those from your list, for example. 

Now such practice has now taken hold in the debt markets. So those who invest in bonds are increasingly choosing to only buy bonds that go towards expenditure with environmental, social, and governance criteria often referred to as ESG. 

The way this works is that an issuer, i.e. the institution looking to raise money through bonds, agrees that the proceeds from the bonds that they raise will go exclusively towards specific types of investments. And there are three types of these so called “Use of Proceeds” bonds: green bonds, social bonds, and sustainability bonds. 

And by and large, these bonds are similar to traditional bonds in every manner, except that the use of proceeds is conditional to the money being raised. In the case of green bonds the proceeds go exclusively to finance climate friendly projects, such as renewable energy, energy efficiency, and other climate mitigation, adaptation efforts. 

Social bonds go towards alleviating socioeconomic issues and sustainability bonds, finance a combination of green and social projects.

* with an ESG mandate

Denise: The market has been growing very quickly. At the same time people say that, increasingly, as you have more and more corporate players in the market, um, the green bonds have a very strong marketing function. How would you speak to that? 

Denise O: So this is true. And I would say that one of the benefits to issuing green bonds is certainly raising awareness of what your company’s strategy is as it relates to climate change.

So in our case, for example, at IFC, we’ve issued over 10 billion of green bonds and we’ve done 173 green bonds in 23 currencies. This green bond program of ours has actually attracted new investors to IFC who had never invested in our bonds prior. 

And when you think about that, we are an institution with a AAA rating, which means we have the highest credit quality there is globally, and we’ve been issuing bonds since 1989. And to think that they are investors who had never given us a look now would buy our bonds if they are green bonds, that in itself shows that this gives a foray into a new, um, investor base, which is a good thing for an issuer. Because the more diverse your investor base is, that contributes to your credit quality and your access to capital even in times of volatility. 

And so green bonds, certainly, beyond the fact that it showcases what you are doing as it relates to climate change, it also does give you this diversity of investors. 

Denise: I wonder if you could explain first of all, how the green bond happens and then tell the story of your own personal experience of that the historic benchmark green bond issue that the IFC did in 2013. 

Denise O: Absolutely with pleasure. To answer the first question, how does a company go about bringing a green bond to market. It’s imperative that issuers  give investors the confidence that their investments will be going towards the right cause, in this case being green. 

So while there are a number of methods to achieve this, the most subscribed pathway would be aligning to the four cornerstones of the Green Bond principles.

Now the Green Bond principles were drafted in 2014 and to date about over 300 institutions, borrowers investors and underwriting banks have signed up to these principles. The four cornerstones are: one that the utilization of proceeds of the bonds must go to green projects. Now this is the foundation of it all.

And this needs to be described in the legal documentation for the bond. All designated green projects that will be financed should provide clear environmental benefits.

The second thing is that the process for project evaluation and selection for the program must communicate the sustainability objectives and issuers need to make it obvious how the project fits within the categories eligible for green financing. 

The third element is that an issuer needs to make known to investors is how they would manage the proceeds before they go to the end project. So say for example, you raised a billion dollars on Monday, and you weren’t going to finance the projects for a month, for example. Well, what are you going to do in that 4-week period before the disbursement, you obviously cannot be investing in investments that contravene climate change adaptation in the interim. 

So that’s quite important. 

And then lastly, and certainly not the least,  is the reporting.

So issuers need to make readily available to investors at least on an annual basis essentially where the money has gone and the impact. So you need to report on the projects that have been financed and the impact of those projects on an annual basis. 

Denise: But who, who verifies all of this stuff? I mean the issuing organization can make all sorts of claims, right?

Denise O: So there are a number of ways that this is done. So primarily if you are aligned to the Green Bond principles, then you would more than likely have what is referred to as an external review. And that’s having an independent party that reviews your use of proceeds.

And not only do they do that, it’s also, if you would think about it as self policing mechanism. In that so you’re aligned to the principles, the underwriters, which is the bank that helps you arrange the bond, puts this in the documentation for the bond. So you are beholden to the investors who are committing their money to you.

And on this annual basis, you ought to be reporting and in some instances you have that report, the impact report on an annual basis, audited by a third party as well. And should you not align to these principles and, um, commit to reporting, for example, certain indices would not include your bond in, in their index, um, stock exchanges as well would not list your bond unless they were aligned with the principles. So there are quite a number of, a variety of ways, in fact, in which this is being, um, for want of a better word policed. 

Denise: And I mean, in your experience from, you know, looking, from the beginning of when the market came into being, and today has the definition of what is green moved at all.

Denise O: Great question, I would say, yes. And it continues to, it’s such a vast area. Green bonds have been in existence for a while. Albeit they’ve been called various names. But I would say since 2006, 2007, when you know, between the European Investment Bank and the World Bank issued the first green-type bonds. The impact reporting that’s tied to these bonds has certainly changed over that time. And that of course is based on what the definition of green is.

Part and parcel of the work that we do within the green bond principles executive committee and the working groups is continually making sure that the green bond principles themselves, as they relate to eligible categories for financing, keeps in momentum and in lock with the market.

There are also quite a number of emerging policies and the regulations to this end, the European taxonomy being one of them. So to answer your question in a short sentence, Yes, what is green has been changing, but I wouldn’t say significantly

And again, it gives a range of opportunities to different kinds of investors. And of late, uh, you may have heard of transition bonds. Um, and then this is a burgeoning area. Which is a green bond, but a green bond that is being made accessible to issuers that are in a brown industry, trying to make the transition into greener alternatives. 

Denise: Can you give a typical example of an organization who’d want to make a transition bond? 

Denise O: It could be an oil and gas company, or it could be a manufacturing company accessing more energy efficient means to their business.

If I were to apply this in a personal capacity, I’ve been in conversations where of course people argue things about. Say, for example, you had solar panels on a petrol station. Is that a green project? And you know, there are some people who would say absolutely not. And some people would say, well, yes it is because it is reducing the amount of energy that that petrol station is using.

So I think this is one area where you do definitely see there is a scientific argument. And then there is certainly an emotional one. I’m actually curious to know from you, do you, would you consider that a green project?

Denise: Um, so a petrol station, which is, which has solar panels being put on it.

(sighs). This is so hard.

Denise O: Exactly. And so this is the thing. You do have a range of investors and some investors say, well, we are not going to reach this two degrees were we only to mollycoddle the greenest industries. We need to essentially encourage the brown industries to become less brown.

I have sat  in meetings where it’s, you know, there’s a debate, um, of how green is it to reduce the energy use of a fossil fuel company. And the argument there is, well, we’re going to reduce, you know, uh, emissions by X number of GHG. You know, some investors would say, absolutely not. External reviewers would say, absolutely not because you’re preserving, you know, the lifetime of this fossil fuel producing asset.

Elsewhere, some would say, well, if you don’t reduce the energy usage, they’re going to carry on anyway, continuing to emit so much in that interim until whenever the lifetime of that asset ends. So from a mathematical and scientific argument, is that green or not? 

Denise: Thank you for going into that. Because it’s fascinating stuff. If you look from the outside, you see this term transition bond and you think, oh it’s greenwashing or it’s allowing non-green companies to masquerade as green-ish and, how offensive. But it’s much more complicated than that.

Denise O: Indeed. 

Denise: So just to finish up on the earlier question, I was curious to hear about the first issue that you were involved in and, also as a way to illustrate how does a green bond happen? 

Denise O: Absolutely. So there’s some context. So at IFC, we issued green bonds in 2010. Up until 2013, the green bond market was very much a niche market in that 

it was one that was based on private investments. So i.e. a pension fund for example would ring and say we would like to invest, I don’t know, a hundred million. And we would like that to only be used for your climate projects. So that’s referred to as a private placement, as there would be just that one investor investing in this bond for that purpose.

And that’s essentially what the market was from when it began in 2006 to 2013.

I joined IFC in 2012. And so in February of 2013, when we issued the first, the world’s first public green bond. Which was a billion dollar benchmark as we call it. It was a very exciting trade and we had spent four weeks prior discussing with a number of investors.

It was hugely, an educational endeavor in reaching out to global investors who had never heard of what a green bond was and a number of the questions were related to will be the use of proceeds. And whether in fact it was more risky than our regular bonds. Which the answer is no, by the way.

This is one of the beauties of the green bond is that it is no additional risk because, um, investors do not have any exposure to the projects being financed, whether or not those projects go belly up, investors get paid nonetheless, because the exposure is only to the issuer’s credit, which in our case is AAA. 

In any case, so this was a month long of canvassing investors to make sure that there was interest in this product. And so when we issue bonds in my team in Washington, um, we tend to do it early in the morning. So it’s, um, business open for London time, which means that we have to be in the office at 3:00 AM. And so I can hear some background noise on your end. 

Denise: So that’s my cat.

Denise O: (laughter) It’s a nice cameo. 

Denise: There’s nothing we can do, we just have to ignore him. 

All right. So you were saying that you have to, you have to be up at 3:00 AM. 

Denise O: So in issuing bonds, if you were based in, in Washington, DC as we tend to start the transaction at London morning, open being London tends to be the capital of the bond world. 

And so for us that means, you know, being on the trading floor at 3:00 AM. That’s in that particular morning and the entire team were on the trading floor, of course the only ones in the building, and we kicked off this trade. All, of course, being very, very apprehensive and wondering what would happen. And much to our surprise, we were overwhelmed by interest from investors. 

For those who are not aware, when you launch a bond, you are essentially going out to the world saying – OK, from this moment on, I’m taking in orders from investors as to, how much you would like to invest in this bond. But by the way, I only want to raise, or I would like to raise a billion dollars. 

And so investors would come back to you saying, well, I’m putting in an order, you know, 10 million, 1 million or 500 million as it were. And so you have this range. And for us, that bond was oversubscribed within the first hour, which essentially meant we received orders for over a billion dollars.

Denise: What would have been a good result for you? 

Denise O: I suppose for every issue, a good result is that you get as much as you are looking to raise. Otherwise, it’s kind of a failed transaction, cause you still need to go and seek the balance of it elsewhere. In fact, if you do not raise as much as you had anticipated, oftentimes, the investors who have committed, could drop out of your order book because they have a minimum threshold to invest in. 

And so to get, you know, three times over subscription is certainly a success. And that first trade is, you know, iconic in that it was the first of its kind, it’s considered a landmark transaction in the green bond market. But every green bond we have issued in the public markets since then, and as I said, we’ve done over 10 billion has been oversubscribed 

Denise: Can you explain that? Is there a more macro point there about that? People who want to have green financial instruments, is there insufficient supply to meet the demand for it. 

Denise O: There certainly is. I think over the last decade, there’s been much more focus on active inclusionary approach to investing.

And this has been raised in my opinion, by the way, awareness of social challenges, such as climate change, you know, the ongoing social development issues targeted by global governments through the SDGs, et cetera.

We had COP21, which was held in Paris. And the multilateral agreements has set the goal of limiting global warming to well below two degrees Celsius. So I think those were some key elements that led to stakeholders being so much more vocal in saying that, OK we are going to put our money where our mouth is, 

Denise: If we fast forward to 2020, now we’re seeing all kinds of actors, such as Alphabet, for example, um, issuing green and sustainability bonds. Uh, and so was there a, uh, sort of a breakthrough, uh, uh, that you have observed in the market where it went from being very much these, um, multilateral institutions, uh, doing a specific type of financing to big corporate. And now, you know, technology players jumping in as well. 

Denise O: I would say that the breakthrough really has been investor education and stakeholder engagement. So when you think of, you know, we all have pensions and we are putting money away in these funds. And you know that the increasing 

number of stakeholders who were saying to their asset manager, what I would like to see beyond the fact that you’re preserving my capital and hopefully making a little bit more money, I would also like for my money to go towards environmental, social needs. At the same rate of return as you had been doing.

So, you know, the fact is that the increase in investors who are now seeking such products because stakeholders like yourself and myself, et cetera, and millennials especially are requesting this and the demand is so high. And so I do think that the breaking point has been the investor education on the social challenges of climate change.

The pandemic now has shown us that the underlying socio economic issues that have always been there, um, have come more to light. And the fact that, you know, supply chains can take, good business being sustainability into their framework, and it’s not something that should be seen as philanthropic, but rather that should be business as usual.

Denise: Right. I wanted to ask, just to play devil’s advocate. I mean, there, there’s a lot of froth and excitement around this field, green bonds, sustainable bonds, um, all kinds of, you know, now we have. Blue bonds, transition bonds, and so on. But, um, with the arrival of players like Alphabet, um, who did a big issue recently? There’s some skepticism about, you know, are they just getting cheap money, uh, that they can use for reputational purposes? 

Is this a fad or is this really a market that can scale and become mainstream?

Denise O: So when you look at how this market has grown and – this market – I refer to sustainable bonds. So that’s green bonds, social bonds, and sustainability bonds. Um, when you look at how this market has grown over the last 10 years, it’s absolutely phenomenal, right? I mean this year alone, you’ve seen almost 400% growth in the increase of social bonds given COVID-19.

Now I would say taking that into context and realizing as well that as much as it’s grown – and we celebrate that and hope it continues to – it’s about 2% of the global bond market. So there is still a huge amount of growth required for it to actually be the new normal. However, I would say that there are steps being taken to encourage that.

So I do not see this as a fad at all. And I do think that, what you did mention, the example of Alphabet. I mean, Alphabet issued a 10 billion bond a couple of weeks ago, August 3rd, to be precise. And of the 10 billion, they earmarked about just less than $6 billion to go to sustainability uses – energy efficiency, clean energy, green buildings, et cetera.

And in addition to that, to support small businesses in their COVID-19 crisis response. So it was a sustainability bond because it’s got green elements and it’s also got social elements, which even include, you know, commitment to racial equity. 

Now they managed to raise what is the world’s largest sustainability bond of all time.

And they also got the lowest ever interest in terms of the coupon being paid across the bond. 

I think that what you did see there in terms of the interest, which was phenomenal. It was a massively oversubscribed transaction. And so they were able to lower the funding costs. 

And I think this is where the future lies, is that at some point for a company, an institution, to be able to access capital at a competitive rate, they would have to have elements of ESG in their framework and beyond just saying that something that’s embedded into their supply chain entirely. So I don’t think of it as a fad at all.

And I see that the increasing number of issuers and also sovereigns, don’t forget. Only this year, as you know, the UK government is considering a green bond. The German government have committed to issuing, you’ve obviously had France has been at the forefront of this. You’ve had Poland issue the first one.

We’ve now I think about 12, if not more sovereigns that have issued green bonds. And so these are the largest bond issuers in the world, typically sovereigns. And as economies, begin to re-open post the COVID-19 crisis here is the opportunity in fact to commit to rebuilding infrastructure in a more sustainable way.

So that our future is certainly much more insulated against such volatility as we have seen in recent times.

Denise:  Thank you so much, Denise, that not only do I feel a little bit smarter on green bonds, but this has opened up basically the road to many more follow up podcasts to answer all of the. It is obviously much more complicated than one would imagine as an outsider. But thank you so much for your time. I really enjoyed it. Do you want to say a few words about how, if people want to learn more about, you know, what’s happening, the IFC and, and your work there, where should they go?

Denise O: Yes, absolutely. I would say that IFC is heralded as the issuer that opened up this market, and we continue to commit to being a regular issue of green bonds. Um, so on an annual basis, we are issuing benchmark public green bonds. In our last fiscal year, we issued 37 green bonds, totaling 1.6 billion, and we tend to do this also in a number of currencies so that we go beyond offering green bonds to just one market, but doing so globally.

We have an impact report on an annual basis, which has won a number of awards. And I encourage listeners to go to our website, which is ifc.org-green bonds to have a look at the kind of projects that we finance using our green bonds. 

Over the last year, we did six sectors, which range from energy efficiency to wind energy, et cetera. We make efforts to translate what the impact numbers are into bite size, more accessible illustrations to the general public, because we often tend to forget when we talk about green bonds that, you know, uh, portfolio managers of bonds are not necessarily climate scientists. Which at IFC, we have very many, we have about 270 professionals in our climate business department alone.

As an illustration, for last year, the portfolio we expected to generate over 3 million megawatt hours in renewable and energy, which is the equivalent to the energy use in Luxembourg for over a year.

So that’s the sort of data point that we put out there. Impact reporting is a huge part of green bonds. And as we discussed earlier, it is one of the self policing mechanisms of green bonds. I encourage listeners to take a look at our impact report and we welcome feedback.

And should you wish to send us feedback, please feel free to email us investors@ifc.org. 

Denise: Thank you so much, Denise, for coming on the show, it’s been a real pleasure. 

Denise O: Thank you very much, Denise.

Denise: Thanks for listening to New Climate Capitalism. You can follow Denise Odaro on Twitter @MissOdaro. To learn more about green bonds and the IFC, go to the resources tab for this episode at  climatenarratives.co

If you enjoyed this episode, you should subscribe to the newsletter, Climate Narratives Annotated. It’s a roundup of the month’s highlights from the world of green finance, plus previews of upcoming episodes as well as bonus clips from the show. Find the link to subscribe via Twitter @NewClimateCap

And the next edition goes out on the 15th.

Many thanks to Valentine Scherer and Victoria Yates for their help producing this episode, and to Lucas Laufen for the theme music.

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