What is it?
The green bonds are like other bonds with one difference
that the issuer publicly states that capital is being raised to fund ‘green projects’, which typically include those relating to renewable energy, emission reductions and so on. The main aim is to finance environmentally friendly businesses and assets. Lately green bonds have emerged as one of the key financing mechanisms for the global economy’s to move towards a greener and sustainable future.
The first green bonds were issued in 2007 by World Bank and European Investment Bank. Ever since the first issue the green bond market has grown exponentially and is currently pegged at over $180 billion. This mode of raising funds has seen extensive participation from corporates and financial institutions, including sovereign and municipal bodies across the world in both developed and developing economies.
2015 was a big year for green bonds as world markets witnessed currency green bonds, innovative structuring and also various nations coming up with their with first green bond issue. Asia has emerged as a top destination for green bonds because of market-driven state policies and rapid growth of green bonds in India and China.
- The Exim Bank of India issued a five-year $500 million green bond, which was India’s first dollar-denominated green bond. Yes Bank also raised Rs 1,000 crore via green bond issue.
- A growing number of corporates and financial institutions have resorted to this innovative mechanism to raise capital and even for attracting foreign investments.
- India also received investment through its first Green Masala Bond(rupee-denominated bond), with the International Financial Corporation raising an off-shore rupee bond on London Stock Exchange for investing in Yes Bank’s green bond. This was a fine example of how innovations in emerging markets can capture global attention.
- Green bond issuance in the country has witnessed a manifold increase and India is now the seventh largest green bond market globally.
- These bonds have been crucial for raising capital for sunrise sectors like renewable energy. It has assisted India in sustainable growth.
- Various sectors which have received investment through the green bonds are the low carbon transport sector and low carbon buildings. However, sectors such as water management and waste management have not been successful enough to raise money through green bonds due to sector-specific issues and also because the projects are smaller in size and geographically dispersed.
Indian regulators have shown exemplary foresight in recognising green bonds as a key tool towards financing the nation’s climate change targets and in guiding the development of the green bond market through necessary policies and reforms.
- In January 2016, the Securities and Exchange Board of India (SEBI) published its official green bond guidelines and requirements for Indian issuers.
- The Reserve Bank of India also passed regulatory reforms for strengthening and expanding India’s corporate bond market
- For greater success, one very important step that needs to be taken is the clear classification of and a formal definition of green projects or green bonds to ensure understanding across sectors.
- India, in the next few years, is also set to introduce the Blue Bond issuance. Blue bonds are those bonds which are specifically used to finance water infrastructure. Globally, the blue bond issue has crossed $10 billion. It is imperative for India to utilise such innovative mechanisms for water infrastructure augmentation as well.
- Other innovative mechanisms such as securitisation can also be promoted. Many standalone green projects such as roof top solar, energy efficiency and rural water supply still remain unattractive to institutional investors owing to the smaller scale and vast geographical spread. Aggregation and securitisation of such projects will give them the much needed push.
- With the focus of urbanisation and infrastructure development in India growing consistently in the policy sphere, the green bonds are expected to witness a huge growth for financing water supply projects in cities such as Pune and Hyderabad and even development of smart cities.
- Collective participation of regulators, policymakers, corporate and financial institutions is also important to utilise the green bonds in addressing climate change.
India’s green bond market has not been tapped completely. It has a limited number of issuers so far. However, because of increasing interest from the government and market regulators, 2017 can expect a further growth in raising capital through the green bonds and also more policy and regulations for the green bond market.