“The climate crisis has already been solved. We already have the facts and solutions. All we have to do is wake up and change”
~ Greta Thunberg
Taking inspiration from Greta’s quote, it will be prudent to believe that to successfully combat climate change, financing mitigation and adaptation efforts at various levels is urgently required. ‘Green Bonds’ are being seen as the first line of defense against climate change and embody the potential to give us a glimpse of a green and joyful life in the future.
The term Green Bond refers to a type of fixed-income instrument that is specifically created to raise money and fund ‘green’ projects. Green bonds are specifically designated to encourage sustainability as they finance projects targeted at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management. They also finance the cultivation of environmentally friendly technologies and projects which help towards the mitigation of climate change.
In 2007, the idea behind Green Bonds was conceived by a few development banks such as the European Investment Bank and the World Bank. Consequently, in 2013, corporates too began participating, which led to its holistic growth.
Green Bonds are mainly of four types such as Green “Use of Proceeds” bond which is secured by assets (comparable to standard bonds). Green “Use of Proceeds” revenue bond which is secured by income-producing projects. Green project bond, secured by a project’s assets and balance sheet and Green securitized bond, secured by a larger asset pool.
Green bonds are seen as beneficial for a variety of reasons. They are designed to help the environment by directing portions of the capital raised to projects related to clean water, renewable energy, energy efficiency, river and habitat restoration, or mitigation of climate change impacts. Many bond funds invest a portion of their capital to such causes, but green bond funds are those which are specifically invested in environmental initiatives while carrying credit ratings similar to other funds. Green bonds typically carry the same credit rating as their issuers’ other debt obligations. They provide investors with a way to earn tax-exempt income with the benefit of knowing that the proceeds of their investment are being used in a positive manner. The issuers of green bonds also benefit, since the green angle can help attract a new subset of younger investors—whom the issuers can profit from over an extended period.
One of the main obstacles to the growth green bonds in financial markets is the risk of ‘greenwashing’. Greenwashing is the practice of directing proceeds from green bonds towards projects having negligible or negative environmental benefits. Greenwashing threatens the reputation of socially conscious investors seeking to expand their investment prospects by investing in environmental, social and governance practices. Certain controversial incidents involve a green bond issuance by the operator of the Three Gorges Corp in China, which has been routinely criticized for polluting water and damaging the surrounding ecosystems. The green bonds issued by GDF Suez in 2014 for financing the Jirau Dam in Brazil, led to the flooding of a rainforest.
To promote the integrity of the green bond market, the International Capital Market Association developed the Green Bond Principles (GBP) in 2014 providing voluntary guidelines for the market’s broad usage, including principles regarding the use of proceeds, process for project evaluation, the selection, management of proceeds and reporting for green bond issuances.
In India, Yes Bank became the first bank to invest in a Green Bond issue worth Rs 1,000 crore in 2015. Following this, few other banks too had green bond issuances. Overall, there is not much awareness regarding green bonds, and Indian companies, and more importantly investors, are not warming much to the idea due to risks of greenwashing. In the Indian context, there are certain challenges for the issuance of Green Bonds in the international markets. These include high currency hedging costs, poor sovereign ratings and low tenure. The full potential of India’s green bond market remains untapped, with only a limited number of issuers so far. Since green bond investors tend to be buy and hold investors, the secondary market for green bonds can be slim. Green bonds may also have some additional transactional costs associated because issuers must track, monitor, and report on the use of proceeds.
However, these costs are quickly declining and expected to be driven down even more as green bonds scale, diversification improves the market, and demand increases. Moreover, many issuers nowadays are realising that the expense is counterbalanced by benefits, such as they can highlight their green assets and business; green bonds also provide them with a positive marketing story thereby diversifying their investor base. Internal collaboration of teams across different departments, such as sustainability, finance, and operations is also improved. Thus, with developed countries reaffirming their $100 billion mobilization goal per year by 2020 to support climate action in emerging nations, utilization of green bonds as an effective vehicle to tap into climate funds is anticipated to grow. In India collective participation of regulators, policymakers, corporate and financial institutions is going to be crucial in pushing frontiers of green bonds further, to overcome the inhibitions of greenwashing and unleashing new opportunities to address climate change.
