Green Bonds : A Few Insights

Dear Crusaders,

We all acquainted that Green Bonds are in the news now days. So here, we are rendering you the few insights of it. It is a crucial topic from the exam point of view, rest assured you are going to get a few questions from this topic in the upcoming exams. So go through it meticulously, and keep yourself abreast of it.

Climate change affects all of us to some extent. But it is expected to hit developing countries the hardest. Its potential effects on temperatures, precipitation patterns, sea levels, and frequency of weather-related disasters pose risks for agriculture, food, and water supplies. At stake are recent gains in the fight against poverty, hunger and disease, and the lives and livelihoods of people in developing countries.

Few people have heard of "green bonds", yet they could be a way of raising the huge amounts of capital needed to tackle climate change and protect our natural world.

They could be critically important, but they remain shrouded in mystery and there is a great deal of confusion about their exact form and structure. What are they? Are they a way for the government to borrow money for green projects? Are they a new savings product for ethical consumers?

This lack of clarity is understandable and is a direct result of all the different types that have been recently proposed. They could, in fact, be all of the following: green gilts, green retail bonds and green investment bank bonds. But, there are many more being proposed as well, including: green infrastructure bonds, *multilateral development bank green bonds, green corporate bonds, green sectoral bonds, rainforest bonds and index-linked carbon bonds.

All of these different (and sometimes confusing) classes of green bond have an important role in helping to raise finance for different parts of our low-carbon transition.

What are green bonds?

A bond is a debt instrument with which an entity raises money from investors. The bond issuer gets capital while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid.

A green bond is very similar. The only difference is that the issuer of a green bond publicly states that capital is being raised to fund ‘green’ projects, which typically include those relating to renewable energy, emission reductions and so on. There is no standard definition of green bonds as of now.

Indian firms like Indian Renewable Energy Development Agency Ltd and Greenko have in the past issued bonds that have been used for financing renewable energy, however, without the tag of green bonds.

Green bonds are issued by multilateral agencies such as the World Bank, corporations, government agencies and municipalities. Institutional investors and pension funds also have appetite for such bonds. For instance, investment funds BlackRock and PIMCO have specific mandates from their investors to invest only in bonds which fund green projects. The issuer provides periodic reports about the project.

Reason behind being in the News:

In March, the Exim Bank of India issued a five-year $500 million green bond, which is India’s first dollar-denominated green bond. The issue was subscribed nearly 3.2 times. The bank has said it would use the net proceeds to fund eligible green projects in countries including Bangladesh and Sri Lanka. Earlier, in February, Yes Bank raised Rs 1,000 crore via a 10-year bond, which was oversubscribed twice.

Importance of it for India: 

India has embarked on an ambitious target of building 175 gigawatt of renewable energy capacity by 2022, from just over 30 gigawatt now. This requires a massive $200 billion in funding. This isn’t easy. As reports suggest, higher interest rates and unattractive terms under which debt is available in India raise the cost of renewable energy by 24-32 per cent compared to the U.S. and Europe. 

Budget allocations have been insufficient. Renewable energy is still part of the larger power/infrastructure funding basket in most banks, and with most financing going towards coal power projects, there is very little funding left for renewable energy. Currently, options for raising funds and investing in the “renewable energy story” in the public markets in India is very limited. That’s why green bonds seem like a good option.

Still, why are green bonds an attractive option?

Shantanu Jaiswal, analyst at Bloomberg New Energy Finance, says, “Green bonds typically carry a lower interest rate than the loans offered by the commercial banks. Hence, when compared to other forms of debt, green bonds offer better returns for an independent power producers,” Samuel Joseph, Chief General Manager, Treasury and Accounts Group, Exim Bank of India, says as these bonds are meant for specific investors looking to invest in renewable energy projects, pricing could be attractive.

The bank’s green bond was priced at 147.50 basis points over US Treasuries (whereas, usually, bonds are priced at treasuries plus 150 basis points) at a fixed coupon of 2.75 per cent per annum.

Green Bonds Performance Globally:

According to Bloomberg New Energy Finance, a record $38.8 billion in green bonds were issued in 2014, 2.6 times the $15 billion issued in 2013. “Most issuances of international green bonds have been oversubscribed suggesting a strong appetite for them especially when done by a strong issuer like a large corporate or a government agency,” the report says. 

 In the last two years, studies have shown that around £200bn of low-carbon infrastructure investment is required in the UK between now and 2020. Ernst & Young estimates though that traditional sources of capital – ranging from utilities through to project finance and infrastructure funds – can only provide £50-80bn over the next 15 years.

Issuers of these bonds?

In the period between 2007 and 2012, supranational organisations such as the European Investment Bank and the World Bank, as also governments, accounted for most of the green bond issue. Since then, corporate interest has risen sharply. In 2014, bonds issued by corporations in the energy and utilities, consumer goods, and real estate sectors accounted for a third of the market, according to KPMG.

The risks and challenges?

Globally, there have been serious debates about whether the projects targeted by green bond issuers are green enough. There have been controversies too. Reuters a few months back reported how activists were claiming that the proceeds of the French utility GDF Suez’s $3.4 billion green bond issue were being used to fund a dam project that hurts the Amazon rainforest in Brazil.

From an Indian perspective, a challenge of making investors subscribe could be the tenor and rating of green bonds, reckons Bloomberg’s Jaiswal. “The downside is that green bonds in India have a shorter tenor period of about 10 years in India whereas a typical loan would be for minimum 13 years. This is less when compared to many international issuances.

Green Bonds 

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