What is a Green Bond?

Green Bonds are financial instruments which are majorly used for projects in climate and
environmental domain. These instruments are usually secured as they are asset-linked and
backed by the issuers’ balance sheet. Green bonds are also often referred to as Climate
bonds since many of these are issued to prevent undesirable climatic changes. Green bonds
spread the concept of sustainability by supporting environmental projects. Green bonds
financed projects are generally aimed at various projects like improving energy efficiency,
prevention of pollution, sustainable practices in agriculture, and protection of aquatic and
terrestrial ecosystems, environment friendly transportation, and sustainable practices of
water management.
Green bonds also come with advantages of tax incentives such as tax savings, which make
them a more attractive investment compared to other comparable taxable bonds. This
feature of Green bonds provides a monetary incentive to tackle major social issues such as
climate change and switching to renewable sources of energy to reduce environmental
harm. To qualify for green bond status, a third party such as the Climate Bond Standard
Board often verifies them that the bond will actually fund projects that benefits the
environment.

Green Bond Issuance

The Green bond market increased to a record high in 2007-08, rising to a mammoth $133
billion worth of investment worldwide. Green bond issuance is expected to increase further
to around $300 billion by 2020 [Source: Moody's].
The World Bank is a major issuer of green bonds. The institution has particularly been
funding a lot of projects in the United States. In US, its issuances totalled over $500 million,
and in India, where its issuances total over INR 3 billion. World Bank’s green bonds are
issued to provide finances for a lot of projects around the world, for instance, the Rampur
Hydropower Project in India, is aimed at providing hydroelectric power to north India. The
project aims to reduce the carbon emissions by generating electricity through coal, diesel
and gas.

Why Green bonds are important for India?

India is targeting a total renewable energy capacity of around 170 GW by 2022, thus for
them, Green bonds are crucial revenue fund raising option. Around $200 billion is required
to finance the renewable energy sector. Most of the funding goes towards coal powered
projects and thus very little is left for renewable energy projects. Add to this, reports
suggest that the higher cost of borrowing and unattractive terms offered through debt
market in India raises the cost of renewable energy by around 30% as compared to US and
Europe.
EXIM Bank in India issued a 5 year green bond worth $500 million in overseas at a coupon
rate of 2.75% in 2015. It received an oversubscription of 3.2 times which shows terrific
interest amongst the investors. The money was used by the bank to finance projects in the
renewable energy sector. [Source: Indianeconomy.net]
In 2014, International financial institutions, governments of various countries and other
agencies raised close to $40 billion through the issue of green bonds.
An important characteristic of green bonds is that the responsibility of repayment is of the
issuer and not with the firm that is utilizing the funds in green projects. Higher credibility of
the issuer like the EXIM Bank helps to mobilize big amounts through bonds at lower interest
rate.
Also, from 2017 to 2018, Indian Railway Finance Corporation has raised a whopping $500
million by issuing 10 year green bonds listed on London Stock Exchange. The bonds have an
annual yield of 3.835%. Yes Bank also raised INR 1000 crore via a 10 year green bond which
was oversubscribed twice.

Benefits for issuers outweigh costs

Green bonds come with extra transaction costs because issuers have to keep a track,
monitor and report on the use of proceeds. However, many issuers offset this initial cost
with the following benefits:
 Highlights their green assets/business
 Provide a positive marketing story
 Diversification of their investor base (as they can now attract ESG/RI specialist
investors)
 Join the internal teams to do the investor roadshow (environmental team with
Investor relations and other business)

Quantifying Green Bonds

The Green Bond Principles aim to set qualitative guidelines; Carbon count provides a
quantitative solution. The Alliance to Save Energy developed carbon count as a metric to
quantify the amount of CO2 emissions reduced per $1,000 of investment. This method of
measuring carbon savings delivers accurate, verifiable numbers to investors and issuers. The
single metric used, i.e. carbon dioxide emissions acts as means of standardizing how green a
bond really is. Since this method is objective, its scores can be compared across diverse
markets.

Market Potential for Green Bonds

At this time, the green bond market is dominated by institutional investors. As these
securities slowly and surely begin entering the retail market, there needs to be a more
systematic way of validating their credibility. As retail investors lack access to information
held by institutional investors, the need for simplified, transparent figures is increasingly
important.