All you wanted to know about Green Bonds
January 12, 2016
The Securities Exchange Board of India (SEBI) has just mooted new guidelines for Green Bonds. We have already had a few Green Bond issues by Indian firms such as Yes Bank and Exim Bank. These bonds are common in the West where there are full fledged funds that invest only in ‘green’ projects.
What is it?
Green bonds are debt instruments that raise money to fund clean energy projects. Companies that raise money through these bonds have to invest it only in areas that are environment-friendly such as renewable energy, waste management, clean transport or sustainable land use.
Though the green bond market has been in existence globally since 2007, in India it has just made a beginning. In February this year, Yes Bank became the first Indian entity to raise money through green bonds, raising Rs.1000 crore from insurance companies, pension funds, mutual fund houses and foreign portfolio investors to fund solar, wind and biomass projects. Later, in March, the EXIM Bank raised about $500 million from international investors through green bonds. Recently, CLP India- a power company raised about Rs. 600 crore for its wind business through these bonds. SEBI’s recent proposals on green bonds call for additional disclosures from the issuers of these bonds detailing where exactly the funds will be deployed.
Why is it important
According to World Bank estimates, even if the world gets warmer by two degrees Celsius in the next 20 or 30 years, there will be an acute shortage of food and water in Asia and Africa. That calls for avoiding greenhouse emissions and cutting back on fossil fuel. But as energy is essential for development, countries are scrounging for alternate ways to fuel their homes and industry. One way out is to add to renewable energy capacity. A key barrier in developing clean energy technologies is lack of funds for research and development. It is to address this issue that ‘green bonds’ were first floated.
India is turning its attention to Green Bonds lately given its pledge at the G20 to significantly shift its energy sources from fossil fuels to clean energy. India currently has just 30 gigawatt of renewable energy capacity and intends to build as much as 175 gigawatt capacity by 2022. Estimates are that for this kind of additional renewable energy capacity, a total investment of about $200 billion would be required. Given the massive investments required, this will need to be supplemented by large amounts of private capital. This is sought to be addressed through Green Bonds.
Why should I care?
Many ambitious initiatives that India undertakes come a cropper for one reason- the lack of funds. Green Bonds, hopefully, will address the funding problem for clean energy initiatives. Green Bonds are expected to raise money for the developers of these projects at lower costs than they would incur on alternative types of loans. On its green bond Yes Bank offered sub-9 per cent rates, while CLP offered 9.15 per cent. This is lower than usual project lending rates of 12-14 per cent.
Green Bonds will also allow issuers to tap into pools of global capital dedicated to ethical climate change and green investing. If Green Bonds manage to reduce capital costs for renewable energy projects, green energy may be produced more cheaply.
The bottom line
If Green bonds help funnel more greenbacks into India’s renewables sector, that’ll mean a cleaner environment for Gen-Next.
Rajlakshmi Nirmal
This article was published on December 7, 2015, in Business Line (The Hindu)