Green Bonds/Climate Bonds Introduction:
Bond is a debt instrument which helps to raise money needed to fund various projects or services. The investor lends money to the issuer who in turn issues bond to the investor. The issuer of the bond pays interest to the investors and returns the capital on bond maturity.Green bonds/Climate Bonds are similar to these bonds only the difference between these two is that green bonds/ climate bonds raise funds for new and existing eligible projects with environmental benefits.
Green Bond/Climate Bond Principals:
There are no proper guidelines regarding the issuance of Green Bonds/Climate Bonds but there are some principals given by International Capital Market Association (ICMA).
The following are the Green Bond/Climate Bond Principles or Four Components of Green Bond/Climate Bond:
- Use of Proceeds
All selected Green Project categories should give clear environmental sustainable benefits and where possible should be calculated or measured by the issuer.
Some categories and sets of standards defining eligible Green Projects already exist in the market that can be used as a guide.
- Renewable energy
- Energy efficiency
- Sustainable waste management
- Sustainable land use
- Biodiversity conservation
- Clean transportation
- Sustainable water management
- Climate change adaptation.
- Project Evaluation and Selection Process
The issuer of a Green Bond/Climate Bond should plan the decision-making process it follows to determine the eligibility of projects using Green Bond/Climate Bond proceeds. This includes:
- A process to determine how the projects fit within Green Bond/Climate Bond Principles;
- The principles making the projects eligible for using the Green Bond/Climate Bond proceeds
- The objectives of environmental sustainability.
- Managing the Proceeds
The money received by the issuer should be credited to sub-account or moved to sub portfolio or it should be traced by the issuer in an organized manner. The proceeds use in the Green Project should be reduced from the sub-accounts; the balance of the traced proceeds should be periodically reduced by similar amounts as eligible green investments or loan disbursements done during that period.
Issuers must at-least annually provide details about the list of projects to which Green Bond/ Climate Bond proceeds are allocated. The GBP recommends the usage of qualitative performance indicators and quantitative performance measures of the expected environmental sustainability effect of the particular investments.
Green Bonds/ Climate Bonds are getting popular:
Many infrastructural projects need finance which is given by banks, NBFCs and Financial Institutions. But this finance is not sufficient to fulfil these long projects, so in order to get sufficient funding new ways should be found out. Green Bonds/Climate Bonds can satisfy these needs.
Many Green Bond/Climate Bond Issues are made in India:
|Yes Bank||10 years||To fund solar, wind and biomass projects||US$148 million|
|Yes Bank||10 years||To fund solar, wind and biomass projects||US$47 million|
|CLP India||In three succession of equal amounts and will mature every April in 2018, 2019 and 2020||–||US$89 million|
|Exim bank||5 years||To fund eligible green projects in countries including Bangladesh and Sri Lanka||$500 million|
|IDBI Bank||5 years||–||US$350 million priced at Treasuries plus 255 bp|
|*Axis Bank||5 years||Green Infra Projects||US$500 million priced at Treasuries plus 175 bp|
* This issue is in process
More about Axis Bank Green Bond/Climate Bond Issue:[Source: Economic Times-23-05-2016]
- India’s third largest private sector lender.
- Raising US$500 million via dollar denominated green bond/Climate Bond sales.
- It is planning to lend to green infrastructure projects in India.
- Rating company S&P Global and Fitch Ratings has given BBB- rating to this bond.
- It will be listing green bonds/climate bonds on London Stock Exchange.
- The bond sale has obtained stamp from Climate Bonds Initiative, an international body concentrating on mobilizing the $100 trillion bond market for climate change solutions.
- These funds will be raised through the bank’s centre branch in Dubai which will help the bank to give green infra projects in the country.
Lower Interest Rates are still attracting Investor:
Green Bond/Climate Bond is safe as compared to other bonds. According to KPMG report, in case of a green bond/climate bond, “proceeds are raised for specific green projects, but refund is tied to the issuer, not the success of the projects.” This means the issuer face risk if the project is not performing.
Advantages of Green Bond/Climate Bond:
- India needs around USD 200 billion by 2022 for achieving its target of 175 gigawatt of renewable energy capacity which is 30 gigawatt right now. So green bond/climate bond can serve this purpose.
- Taking loan from banks or other financial institutions is sometimes unaffordable due to higher interest rates and unattractive terms. These factors increase the cost of renewable energy installation in India. So Green bonds/Climate bonds are best suitable for this requirement which provide money at low interest rates.
- Raising funds and financing in renewable energy in the public markets in India are restricted which is why green bonds/climate bonds are a good option.
- Interest rates are lower than commercial bank loans therefore green bonds/climate bonds are more suitable for independent power producers.
- Repayment of the principal amount is linked with the issuer and not with the progress of the Green Project; therefore green bonds/climate bonds carry lower risk and are beneficial to the investors.
Risks of Green Bonds/Climate Bonds:
- Chances of project getting eligibility as green project is high even though it is not.
- Green Bond/Climate Bond ratings and tenor along with currency risk are serious risk issues.
- Green bonds/Climate bonds in India have briefer tenor periods of 10 years in India while usual loan is for at-least 13 years, which is less compared to international issuance’s
- Bond buyers may not invest in bonds rated lower than AAA- also.