In spite of the latent potential of green bonds, India is yet to witness a hectic activity on this front. This can be attributed to the lack of awareness regarding the benefits of this form of investment. Green must be promoted
Cities are exceedingly becoming the hotspots for climate change, thanks to high levels of vehicular pollution made worse by an ever-increasing population that exerts overbearing pressure on the available natural resources in these areas. The adverse environmental footprint generated by cities has urged many nations to swiftly develop climate mitigation and adaptation plans. Given this scenario, each country is striving to showcase its cities as model benchmarks for climate change adaptation. According to the UN-Compact of Mayors report, as of November 2016, 271 cities in developing countries have crafted strategies to combat climate change but are severely lacking the capital necessary to implement these plans.
Cities across the world need a sustainable source of funding that can help finance the climate adaptation strategies and green bonds are increasingly emerging as a solution for the purpose. 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 includes those relating to renewable energy and emission reductions.
Since 2007, green bonds worth $131 billion have been sold to institutional and retail investors who have been attracted by their link to green projects, goods and services. The last few years have seen an exponential increase in the value of annual bonds issued, from $3.2 billion in 2012 to $44 billion in 2015. According to a Bloomberg study, the year 2016 is expected to reach $75 billion worth of bonds issued. These have helped the cities to finance low-carbon, climate-resilient infrastructure to meet the water, energy, housing and transportation needs of their expanding urban populations.
Green bonds are not new to India. Firms such as the Indian Renewable Energy Development Agency ltd and Greenko have in the past issued bonds that have been used for financing renewable energy. In 2015, 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 directed the funds received from the bonds to fund eligible green projects in countries, including Bangladesh and Sri lanka. Similarly, in the same year, Yes Bank raised Rs1,000 crore via a 10-year bond, which was oversubscribed twice.
As India braces for a high-paced development that is environment-friendly, there is a need for substantial doses of finance. The ambitious target of increasing the renewable energy capacity from 30 gigawatt currently to 175 gigawatt of by the year 2022 is an apt example. This project would need a massive $200 billion in funding. Project financing is an expensive proposition in India due to high interest rates and unattractive terms of debt. This invariably raises the cost of renewable energy by 24-32 per cent compared to the US and Europe.
As Government budgetary allocations fall short and banks concentrate more on funding coal powered projects, the financing options for green projects become very limited. In a bleak scenario such as this, green bonds can prove to be a real game-changer.
Additionally, green bonds are also inherently profitable for all parties involved. For instance due to their lower interest rate than the loans offered by the commercial banks, green bonds offer better returns for independent power producers. On the other hand, for an investor, green bonds are favourable as they carry lower risk than other bonds — as in case of a green bond, the proceeds are raised for specific green projects, but repayment is tied to the issuer, not the success of the projects. This means that the risk of the project not performing stays with the issuer rather than investor.
In spite of the latent potential of green bonds, India is yet to witness a hectic activity on this front. This can be attributed to the lack of awareness regarding the benefits of this form of investment. Additionally, the tenure of green bonds in India is about 10 years, whereas a typical loan would be for a minimum of 13 years. This is less when compared to many international issuances. Also, many Indian investors are wary of bond rating and are not in favour of investing in bonds that are rated lower than the AAA.
The Governments can help popularise green bonds by establishing a clearer certification and ratings systems and issuing more of them. In addition to this, the authorities must also educate the public about their financial and environmental benefits. These measures will increase investors’ confidence, and as confidence increases, the market will grow.
(The writer is an environmental journalist)