The introduction of Green Bonds promises to resolve the issues of funding in the fast-evolving renewable energy sector. India has set an ambitious target of 175 GW of renewable energy by 2022 and an estimated investment of US$200 Billion is required to achieve the said capacity. The unavailability of funds is perceived to be the principal roadblock in achievement of the said target. The Green Bonds offer an ideal solution by emerging as a major source of funding for the renewable sector.
A green bond cannot be defined in specific terms. In common parlance, a Green Bond is a type of bond instrument where the proceeds are applied exclusively to finance or refinance new and/ or existing eligible green projects such as renewable and sustained energy, sustainable water management, clean transportation etc. However, functionally a Green Bond is like any other conventional bond issued by an issuer for raising funds from the prospective investors. In other words, a Green Bond is a conventional bond with green features.
Along with India’s ambition of renewable energy production and investment by the year 2022, India’s Intended Nationally Determined Contribution (INDC) has set targets for India’s contribution towards climate improvement and following a low carbon path to progress. Lack of sufficient funds is hindering the growth trajectory. Traditionally, similar to any other infrastructure sector projects, banks and nonbanking finance companies have been the primary source of funding for renewable energy. However, the banks will have limited appetite for a major role as providers of longterm debt for renewable energy projects as they are weighed down by the risk of an asset-liability mismatch. The long-term funds available with insurance and pension funds in India are not being adequately channelized to meet the debt requirement of the renewable energy sector due to the regulatory restrictions.
Thus, the existing traditional financing sources may not be sufficient to support capacity addition, and given the huge financial requirement of the renewable energy sector, there is a dire need to identify alternate sources to supplement and widen the channels of renewable sector funding.
Green Bond, as a part of corporate bonds is a fast-emerging source for clean energy capital. Green Bonds enable the issuers to tap into a global and domestic pool of fixed income capital, and attract investor groups who have focussed interests in sustainability and responsible investment and whose investment guidelines allow them to invest in different qualities of Green Bonds.
In 2007, European Investment Bank issued first climate- focused bond in the form of a structured product. In 2008, the World Bank issued the first bond labeled “Green” for mainstream investors with a fixed coupon. By 2010, they were joined by various other multilateral agencies such as the IFC and by public entities (governments, agencies and municipalities) in issuing a total of about US$4 Billion worth of climate-focused bonds. The annual global issuance of Green Bonds have grown by more than 35 times to US$ 37 Billion within first seven years since its first launch. 1Moody’s reported in February 2016 that Green Bond issuance for 2016 could exceed US$ 50 Billion.
Overall, Europe hosts the highest number of Green Bonds, with nearly US$ 18.4 Billion issued in 2015. About US$ 10.5 Billion came from the U.S, where the market was mainly driven by municipal green bonds. U.S surpassed supranational institutions and is the largest Green bond issuing country in 2015. Sevennew countries including India joined the Green Bond market in 2015 jointly raising Green Bonds worth US$ 3.2 Billion.
India is poised to attain greater heights in this emerging market. We have witnessed a steady rise in the last eighteen months. According to Natural Resources Defense Council (NRDC), India’s Green Bond investments raised US$ 1.1 Billion in 2015, showing great prospects in its first year. Yes Bank issued India’s first euro denominated “Green Bond” of INR 10 Billion in February 2015, and followed up with another issue of INR 3.15 Billion Green Bond in August, 2015. Yes Bank’s second issue was entirely subscribed by the International Finance Corporation (IFC). IFC then financed the said investment by issuing a “Green Masala Bond” (an Indian Rupee denominated bond sold overseas) which was also a first. In March 2015, the EXIM Bank issued India’s first dollar denominated “Green Bond” of US$ 500 Million. In September 2015, CLP Wind Farms (India) issued India’s first “Corporate Green Bond” of US$ 90.3 Million to fund 150 MW of wind power. Further, IDBI Bank Limited raised Green Bonds of US$ 350 Million for renewable energy projects. In February 2016, Hero Future Energies issued India’s first certified climate bond and raised US$ 44 Million to finance the development of wind energy projects in India.4
Recently, NPTC Limited became the first Indian corporate to offer Green Masala Bonds with certification from Climate Bonds Initiative and raised INR 20 Billion through Rupee denominated bonds from the offshore market.
The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“SEBI Debt Regulations”) governs the public issue of debt securities and listing of debt securities issued through public or private placement route, on a recognised stock exchange in India.
While, on-shore Green Bonds could have been issued and listed under the SEBI Debt Regulations, however, in the absence of clear directions or provisions in the SEBI Debt Regulations there was an ambiguity as to what would constitute a Green Bond and what is the process required to be followed. With the object to bring about uniformity regarding the Green Bonds and to remove future confusion around the subject matter, the SEBI in its meeting held on January 11, 2016 approved the new norms for issuing and listing of ‘Green Bonds’.
Although the process of issuing Green Bonds is generally the same as issuing other corporate bonds, there are few additional disclosures pertaining to the periodic reporting of fund allocation. The issuer would have to make disclosures including use of proceeds, list of projects to which Green Bond proceeds have been allocated in the annual report and periodical filings made to the stock exchanges. The other salient features are as under:
However, given the fact that the availability of such third party reviewer/ certifier/ validator in India is not adequate and globally such review is not mandatory, the same has been kept optional by SEBI.
The above measures are expected to facilitate investment decisions of the investors who have a mandate to focus on green investments and will also provide uniformity in disclosures Conclusion
The global Green Bond market is growing rapidly and India is garnering international attention in the form of foreign investment to finance various ongoing projects.
These bonds can not only be raised offshore but on-shore as well by financial institutions, private sector or public sector organisations. The Government of India has ambitious plans to promote the renewable energy and achieve 175 GWof renewable energy by 2022, for which an estimated investment of US$200 Billion is required. The green bonds are likely to play an important role in realising the same.
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