What, Why and How of Green Bonds?

The article answers few pertinent questions related to definition of green bonds, their present status and future potential.

Created On: Dec 7, 2015 17:35 ISTModified On: Dec 7, 2015 18:03 IST

The Securities and Exchange Board of India (SEBI) on 3 December 2015 released Concept paper for issuance of Green Bonds.

Against this backdrop, the SEBI explained few pertinent questions related to its definition, present status and future potential.

What is a green bond?

A green bond is like any other bond where a debt instrument is issued by an entity for raising funds from investors. However what differentiates a Green bond from other bonds is that the proceeds of a Green Bond offering are 'ear-marked' for use towards financing ‘green’ projects.

Thus the key difference between a ‘green’ bond and a regular bond is that the issuer publicly states it is raising capital to fund ‘green’ projects, assets or business activities with an environmental benefit, such as renewable energy, low carbon transport etc.

However, as of now there is no standard definition of green bonds and the one that is being currently used is based on market practice.

What is the Need for Green Bonds?

Inadequacy of traditional instruments: Given the huge investment requirements in infrastructure space, it is widely accepted that current project financing sources may not be sufficient for capacity addition.

Thus, there is a need to introduce new means of financing and innovative financial instruments that can leverage a wider investor base such as pension funds, sovereign wealth funds, insurance companies, etc. that can invest in the infrastructure sector.

To fulfill India’s global commitments: As per an estimate, to fulfill India’s Intended Nationally Determined Contribution (INDC) goals at least  2.5 trillion US dollars (at 2014-15 prices) will be required between 2015 and 2030.

In this regard, the INDC document talks about the introduction of Tax Free Infrastructure Bonds of 794 million US dollars for funding of renewable energy projects during the year 2015-16.

To reach India’s renewable energy target: India has embarked upon an ambitious target of building 175 GW of renewable energy capacity by 2022 and this requires a massive estimated funding of 200 billion US dollars.

Thus, the financing needs of renewable energy space require new channels to be explored which can provide not only the requisite financing, but may also help in reducing the cost of the capital. Green bonds as a part of corporate bonds space may be one of the answer to this problem.

What are the benefits of issuing Green Bonds?

Positive Public Relations: Green bonds can help in enhancing an issuer’s reputation, as this is an effective way for an issuer to demonstrate its green credentials. It displays the issuers commitment towards the development and sustainability of the environment. Further, this may also generate some positive publicity for the issuer.

Investor Diversification: There are specific global pools of capital, which are earmarked towards investment in Green Ventures. This source of capital focuses primarily on environmental, social and governance (ESG) related aspects of the projects in which they intend to invest.

Thus, green bonds provide an issuer the access to such investors which they otherwise may not be able to tap with a regular bond.

Potential for pricing advantage: The green bond issuance attracts wider investor base and this may in turn benefit the issuers in terms of better pricing of their bonds vis-a-vis aregular bond. Further, with increasing focus of the global investor community towards green investments, it is expected that new set of investors will enter into this space leading to lowering the cost of funding for green projects.

International Experience: Issuance of green bonds started in year 2007 and in the initial years Green Bonds were a niche product, pioneered by a handful of development banks. The period between 2007 and 2012 was featured with the issuance of green bonds by the multilateral organizations such as the European Investment Bank and the World Bank, along with few governments etc.

The Green Bond market has almost tripled in size between 2013 and 2014, with around 37 billion US dollars issued in 2014.

What is the status of Green Bond market in India?

The Green Bond market in India is still in the nascent stage in India. So far, only four entities-Yes Bank, CLP India, IDBI Bank and Exim Bank of India have issued Green Bonds in the country.

While Yes Bank and CLP India issued bonds worth 1315 and 600 crore rupees respectively, Exim Bank of India raised 500 million US dollars in March 2015 to fund eligible green projects in countries including Bangladesh and Sri Lanka.

For assigning the status of the bonds as Green, such money must be invested in renewable and sustainable energy, clean transportation, climate change adaptation, etc.

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