What are Green Bonds?
Reserve Bank of India (RBI) has published a study that the cost of issuing 'Green Bonds' has remained higher than the other bonds in India due to asymmetric information.
Highlights of RBI's study:
1- The study underlines that Green Bonds constituted only 0.7% of all the bonds issued in India since 2018.
2- As of March 2020, bank lending to renewable energy constituted 7.9% of outstanding band credit to the power sector.
3- In India, most of these bonds are issued by the public sector units or corporates with better financial health.
4- The Green Bonds have higher coupon rates than the corporate government bonds with similar tenure.
5- Information failure or asymmetric information along with a high coupon rate are the major reasons behind high borrowing cost.
6- A better information dissemination system is the need of the hour as it could help in reducing maturity mismatches, borrowing costs and lead to efficient resource allocation.
What is a Green Bond?
It is a debt instrument that is specially reserved to raise money for climate and environmental projects. They typically come with tax incentives such as tax exemptions and tax credits to attract investors.
First official Green Bond was released by the World Bank in 2009. The World Bank is a major issuer of Green Bonds. It has been active in the United States and its issuances have totalled USD 5.3 billion between FY 2014 and FY 2018. In India, its issuances have totalled over Rs. 2.7 billion.
Benefits of Green Bonds:
1- Green Bonds enhances issuer's reputation and showcases its commitment to sustainable development.
2- They typically have a lower interest rate than the loans offered by the commercial banks.
3- Foreign investors are focussing more on green investments which in turn may help in reducing the cost of raising capital.
4- They have been crucial in increasing financing to sunrise sectors such as renewable energy, thereby contributing to sustainable growth.
India and the Green Bond Market:
1- In 2018, State Bank of India (SBI) entered the Green Bond market with $650 million certified climate bond.
2- In the first half of 2019, India became the second-largest Green Bond market globally after China with $10.3 billion worth of transactions, as per the Economic Survey 2019-20.
3- In October 2019, India joined the International Platform on Sustainable Finance (IPSF) to scale up the environment-friendly investments.
Challenges associated with Green Bonds:
1- The projects targeted by green bond issuers are debatable. It has been noted that many times that the proceeds of green bonds are being used to fund projects that harm the environment.
2- There's a lack of credit ratings or rating guidelines for Green Bonds or Green Projects.
3- Green Bonds in India have a tenure of 10 years while a typical loan is of minimum 13 years. Furthermore, green projects require more time to drive returns.
Thus, to sum up, there is a need for standard guidelines for a robust Green Bond market. Strategic public-sector investments may attract private investors and build their confidence in the Green Bond market.