Prodded by the Paris Climate Agreement, public sector companies are making a beeline to raise money through green bonds, a new mode of financing that is increasingly gaining popularity globally.
Some Indian banks and companies have issued the papers in local and overseas markets. Government companies in India and abroad are taking the lead to increase green bond issuances.
Globally, green financing is assuming significance as most major investors are increasingly aligning their books to invest in projects that have a sustainable carbon footprint. The market for green bonds are also expanding, though this is at a nascent stage in India. But this might change soon as the Reserve Bank of India (RBI) is coming up with green bond guidelines and preparing a framework enabling issuance of these bonds in large numbers. The Securities and Exchange Board of India has issued green bond guidelines.
Green bonds are regular bonds, but the proceeds are used to invest in green projects, such as low-emission power generation projects, renewable energy, recycling plants, etc. In the Paris Climate Agreement, countries had pledged to cut carbon footprints and limit global temperature rise to less than two percentage points. India is a signatory to this pact and will have to aggressively invest in green projects that should start replacing polluting power infrastructure by 2020. The government’s resolve to move towards electric vehicles by 2030 is part of that commitment.
In the initial stage, green bonds could be backed by banks to enhance the credit ratings. This would be beneficial for the issuer as rates would be finer for them than regular bonds. Besides, this would also expand investor base.
“There are niche funds that would be only interested in instruments of green projects. In India, such a market has not developed yet and, therefore, these investors are not present in the country,” said Sandeep Bhattacharya, India Projects Manager for Climate Bonds Initiative, a green certification provider and standard creator.
YES Bank was the first green bond issuer in India, raising Rs 1,000 crore through these rupee bonds in February 2015. The first overseas issuer was Exim Bank, raising $500 million through green bonds in the following month. In the local market, Rs 8,957 crore of climate bonds have been issued, while $4.7 billion of these bonds have been issued by Indian firms in the overseas markets.
The latest to issue green dollar bonds was Indian Railway Finance Corporation (IRFC). Sources said the company was expected to tap this market frequently to finance its green projects, such as dedicated freight railway lines and public passenger services.
Insurance companies are major investors of green bonds as adverse weather conditions due to environment causes could make the industry go bankrupt. India’s insurance industry is yet to wake up to this reality. Besides, green bonds could also become a source of cheap funding for a number of smaller firms, especially those that cannot access the bond market on their own. “These power producers, for example, that are generating power of, say, about 10 megawatt or so, can be pooled together to raise one green bond. But the market needs some support for that,” said Bhattacharya.
In the absence of a credible infrastructure for the bonds, the United Nations Development Programme (UNDP) is trying to create an ecosystem in India.
UNDP’s climate aggregation platform (CAP), developed in partnership with Climate Bonds Initiative, aims to help build pipelines of standardised, low-carbon energy assets in developing countries and to develop low-cost sources of financing for these assets, tapping new and diverse investor bases. It is trying to promote standardisation in such smaller projects so that large-scale aggregation is possible.
“Energy systems of the future will incorporate many millions of individual small-scale, low-carbon energy assets, made up of both distributed renewable energy generation and consumer-driven energy efficiency measures. Some of this demand will be met through innovative business models such as pay-as-you-go systems in high growth, mobile-based economies,” the CAP website says.