MMS PROJECT

Introduction

The present project revolves around “Green Financial Products and Services” in India
as well as around the world. Green car loans, energy efficiency mortgages, alternative
energy venture capital, eco-savings deposits, and “green” credit cards; these items
represent merely a handful of innovative, “green” financial products that are currently
offered around the globe.

The purpose of this project is to examine the currently available “green” financial
products and services, with a focus on lesson learning opportunities, the nature and
transferability of best practices, and how key designs can potentially increase market
share and generate profits, while improving brand recognition and enhancing
reputation. Following an overview of “green” banking’s current state of play, both in
India and abroad, this report discusses potential options for future environmental
banking products and services for the worldwide financial sector.

The project will also analyze the current trends and the prospects of Green Bonds
Issuance in India and abroad and the role played by Market Regulators like SEBI for
the development of Green Financial Products such as Green Bonds (also known as
climate bonds). We will also see how Yes Bank pioneered Green Bonds Issuance in
India and its social impact.

In general, three broad, related drivers and trends are behind the emergence and growth
in “green” product and service demand: environmental knowledge and media
coverage; environmental awareness and public opinion; and environmental regulation
and legislation. To gauge where the demand and market for these items may be headed,
it is important to explore the past and present state of such developments all over the
world. This project will analyze these drivers and trends behind the emergence and
growth of Green products and services and how it will continue to fuel the growth in
the future.

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Objectives

 To study the various Green Financial Products and Services offered around
the globe and its volume.

 To study the need of Green Financial Products and Services as new financing
tool.

 To analyze the environmental and social impact of Green bonds in India with special
reference to yes bank.

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NEED FOR THE STUDY

 To know the main drivers and trends behind “green” financial product and

service development

 To recognize the current and potential demand for “green” financial products

and services

 To know what “green” financial products and services are currently being

offered

 To know what best practices and lessons learned can be identified in terms of

experience with “green” financial products and services

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Literature Review

 According to Heike Reichelt, Head of Investor Relations and New Products of World
Bank, The capital markets will need to play an important role in mobilizing private
funding for climate change mitigation and adaptation projects. However, to raise the
funds required to make an impact in the fight against climate change, investment
products must be designed to appeal to investors with a substantial asset base. Pension
funds and sovereign wealth funds have large allocations to fixed income. She further
states that Green Bonds are an example of an innovative fixed income investment
product that appeals to investors for this asset class and can pave the way for the next
phase of products to mobilize significant capital to finance the greatest challenge
faced by our generation.

 Daniel Arvidsson of Royal Institute of Technology, Sweden states that previous

studies have shown that corporations benefit from CSR engagement by reputation
growth and as well as financial benefits. Issuing green bonds is a way of marketing
your commitment to CSR activities. Several larger financial institutions for example
Barclays have shown that green bonds are traded at a premium of 20 basis points on
the secondary market. Since many investors have policies which forces them to invest
in a certain amount of green investments this could in the long run mean lower
interest rates for companies issuing green bonds. These benefits might not be visible
when in the current beneficial market conditions but could become useful when the
market conditions deteriorate or when companies’ ability to borrow gets restricted.
Arvidsson mentions few benefits seen by the issuer with issuance of Green Bonds,
which include- Enlargement of Investor base, Higher demand among investors than
regular bonds, Credible way of communicating company’s sustainability goals, and
Enhance company’s reputation.

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Research Methodology

Type of research

Descriptive research

Method of data collection : Secondary data

 Company websites

 Yes bank annual reports

 SEBI website

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Findings and Analysis

Introduction to the Green Financial Products and Services

Green car loans, energy efficiency mortgages, alternative energy venture capital, eco-
savings deposits, and “green” credit cards; these items represent merely a handful of
innovative, “green” financial products that are currently offered around the globe. In
an age where environmental risks and opportunities abound, so too have the options
for reconciling environmental matters with lending and financing arrangements.

The purpose of this report is to examine the currently available “green” financial
products and services, with a focus on lesson learning opportunities, the nature and
transferability of best practices, and how key designs can potentially increase market
share and generate profits, while improving brand recognition and enhancing
reputation. Following an overview of “green” banking’s current state of play, both in
India and abroad, this report discusses potential options for future environmental
banking products and services for the worldwide financial sector.
With the entire world becoming environment conscious, financial industry is not far
behind in its contribution towards greener world. Green financial products are
introduced in the financial industry providing platform for ethical and eco-friendly
investment. Many organizations have realized that there is direct correlation between
competitiveness & profitability and environmental protection. Keeping this in mind
financial institutions have developed “green” financial products with the aim of
promotion of sustainable development. These green financial products must reduce
negative environmental impacts or provide environmental benefits.

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Green assets under management :

Green Products and Services on Offer

Green Home Mortgages: These are special kind of mortgages for new homes which
comply green energy consumption standards. The interest rate offered on these
mortgages are usually 1-2% lesser than the market rate. In certain countries exemption
from income tax can be claimed if an individual has opted for green mortgage product.

Green Commercial Building Loan: Attractive loan designs and arrangements have
emerged for “green” commercial buildings, characterized by lower energy
consumption (~15-25%), reduced waste and less pollution than traditional buildings.

Green Auto and Fleet loan: With below market interest rates, green car loans aim to
incentivize the uptake of cars that demonstrate low GHG intensity and/or high fuel
efficiency ratings. The number of these products has increased in recent years, with
the majority being offered in Australia and Europe.

Green credit and debit cards: A broad family of green products includes debit and
credit cards linked to environmental activities. “Green” credit cards offered by most

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large credit card companies, typically offer NGO donations equal to approximately
half a percentage point on every purchase, balance transfer or cash advance made by
the card owner. In September 2006, Rabobank launched an innovative ‘climate credit
card’. The bank pledges to pay a proportionate sum to support WWF projects,
depending on the energy intensity of the product or service bought with the card.

Green Mortgage Based Securities: A “green” mortgage-backed security package

mortgages on buildings that meet specific energy-use and environmental benchmarks.
“Green” Mortgage-Backed Securities in the early stages of product design and
discussion would hold energy efficient and environmentally-friendly commercial
buildings. These “green” products could be rated higher and worth more than
traditional mortgage-backed securities as a result of the operational savings and
marketability, as well as other tangible and intangible benefits associated with “green”
facilities; added value features that could result in better and cheaper access to capital
for potential owners and investor in green building projects. However, like other
lending scenarios related to “green” buildings, this scenario is highly dependent on the
financial community being able to accurately measure and value savings and
reductions associated with building “green.

Carbon Funds: A carbon procurement vehicle (or carbon fund) is a collective

investment scheme which receives money from investors and uses this money to buy
carbon credits from, or invest into, greenhouse gas (GHG) emissions reduction
projects, generally through the Kyoto Protocol’s CDM and Joint Implementation (JI)
schemes. After a certain defined period, the carbon fund will then give investors carbon
credits and/or cash in return.

Green Insurance: The insurance sector can generally be divided into two categories:
Life Insurance; and General (Non-Life) Insurance. “Green” insurance falls under the
latter and typically encompasses two product areas:

1) Those which allow an insurance premium differentiation on the basis of

environmentally relevant characteristics; and

2) Insurance products specifically tailored for clean technologies and emissions

reducing activities. Mileage-based insurance is offered to vehicle owners. Discount is

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offered for hybrid and fuel-efficient vehicles. Bank can also choose to offset vehicle’s
annual emissions.

There are some issues which impede the growth of Green financial products. Green
products have still not been able to position themselves as an economically viable
option as many lower cost products exist in the market. Unlike of what is happening
today in Europe, where the market of "green" financial products & services is growing
substantially, globally, even though the market appears to grow, it is in an early stage,
with indefinite boundaries and without having gained unified characteristics,
differentiating it from the traditional industries.

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Drivers & Trends of “Green” Product Demand

In general, three broad, related drivers and trends are behind the emergence and growth
in “green” product and service demand: environmental knowledge and media
coverage; environmental awareness and public opinion; and environmental regulation
and legislation. To gauge where the demand and market for these items may be headed,
it is important to explore the past and present state of such developments all over the
world.

Environmental Knowledge & Coverage

The information age has enabled an unprecedented awareness about the severity,
sources and implications of various environmental challenges, such as air quality,
water scarcity and soil erosion. As history shows, widespread media coverage on
environmental challenges can lead consumer behavior to change, sometimes rapidly,
towards far-reaching environmental action. The broad consensus on the science and
effects of climate change, for example, is no longer discussed only by select members
of the scientific community but is reaching all segments of society. In response,
consumer and shareholders are beginning to shift towards climate- friendly actions and
behavior, and heightening demand for the implementation of climate regulations.
Depending on the region, however, the rate of this societal transformation differs.

Environmental Awareness & Public Opinion

In Europe, the relatively high degree of environmental awareness and government

support is reflected in the ever-growing consumer demand for “eco-friendly” products
and services. While still behind Europe, recent opinion polls and corporate/shareholder
actions suggest a rapid environmental awakening is currently building momentum in
North America.

In the US, a 2007 poll conducted by the Yale Centre of Environmental Law and
Policy's Environmental Attitudes and Behavior Project found that 83% of Americans
consider global warming a “serious” problem. The study also found that, more than
ever before, Americans claim to have “serious concerns about environmental threats”.

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Other environmental issues causing concern include: toxic soil and water (92%, up
from 85% in 2004); deforestation (89%, up from 78%); air pollution (93%, up from
87%); and the extinction of wildlife (83%, up from 72% in 2005). The nationwide
survey also showed 63% of Americans believe the US “is in as much danger from
environmental hazards, such as air pollution and global warming, as it is from
terrorists.”

With respect to climate change, the above study found: 75% of respondents
acknowledge their own behavior can help reduce global warming; 81% feel it is their
responsibility to take action against environmental challenge; and, these results
“suggest that many Americans want greener products and are prepared to spend money
to try new technologies that will help reduce GHG emissions”18. Specifically, the poll
found that 75% of the public is willing to purchase solar panels, and 67% would
consider buying a hybrid vehicle.

In Canada, recent public opinion regarding the importance of environmental issues has
climbed to extraordinary levels, during a very short period of time. Historically, polls
on the Canadian public’s top priority saw “the environment” issue fluctuate between
4% and 12% for more than a decade. However, today, the Strategic Council Poll places
this issue at 26%, and the Environics Poll at 31%19. This radical shift in popular
opinion has simply never been seen before.

Environmental Regulation and Legislation

Legislative and regulatory actions, particularly regarding the price/market certainty

they provide environmental markets and constraints they induce on unsustainable
practices and operations, can significantly stimulate demand for “green” products and
services among all types of stakeholders.

In Europe, proactive governmental policy, such as the European CO2 Emissions

Trading Scheme, German feed-in-tariffs for renewable energy and Dutch Green Funds,
has helped trigger both demand for, and development of, “greener” consumer options.
At the same time, this policy support has reinforced environmental attitudes and
behavior among the general public, while establishing high degrees of market

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certainty for environmental commodities and services. In contrast – and specific to

climate change – the US’ refusal to ratify the Kyoto Protocol and Canada’s wavering
on meeting its Kyoto targets, likely slowed North America’s momentum in tackling
climate change.

Over the past couple of years, the American political scene has undergone a major shift
with respect to environmental issues, in which the mid-term US elections created a
circumstance where the question is not if carbon regulatory constraints will be enacted,
but how soon will these be implemented? Currently, there are a range of climate
change bills being proposed in both the Senate and the House, Similarly, Canada is
also on the brink of enacting nationwide GHG legislation, as well as limits on other air
pollutants (CACs).

The above drivers and trends indicate that demand for environmental products and
services in general, and “green” financial products and services in particular, is on the
rise all over the world. In comparing “green” evolution of North America’s behaviors
and attitudes against that which occurred – and continues to occur – in Europe, it
becomes apparent why North America’s financial institutions have been slower in
offering “green” banking products and services. At the same time, however, this
comparison also lends itself to posit the eco-direction in which they are headed. It also
gives direction to the developing countries like India, Brazil etc. on how “green”
revolution can be adapted.

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Product and Opportunity Assessment

Given that most “green” financial products and services have only recently been
launched, it is challenging to gauge, with any level of certainty, their current or
potential success in the financial services sector. However, opportunities can be
grouped as follows:

1) Emerging Opportunities;

2) “First Mover” Opportunities;

3) Partnership and Product Alignment Opportunities; and

4) Marketing and Strategy Opportunities.

Emerging Opportunities

Green Commercial Real Estate

Develop products and services aimed at the green commercial building sector. In North
America, the green commercial building sector is growing at a phenomenal pace. By
the end of 2006, over 6% of the US’ non-residential construction, equivalent to
approximately US$15 billion was considered ‘green’, whereas six years ago this
segment was less than 1%. In 2007, according to a McGraw-Hill Construction survey,
it is estimated that nearly two-thirds of US builders will opt for green over
conventional designs. Today, the US federal government, 15 states and 46 cities
require new public buildings to meet the US Green Building Council’s LEED
standards, and 4 of the 15 states offer incentives to develop certified green buildings.
Expedited permit procedures for these projects, such as those taking place in Chicago
and Pasadena, have driven demand for builders committed to building green. With
these observations in mind, private financial institutions that begin to invest today –
both internally (employee knowledge) and externally (building finance) – in North
America’s green buildings sector will likely see significant benefits down the road. As
in most potential growth markets, players that enter this space early on can build

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the credibility, reputation and expertise required to enjoy a competitive edge as the
market flourishes. The faster this growth occurs, the better positioned and experienced
a firm will be to effectively supply growing demand, prompting further credibility and
enhanced reputation in the market. Keeping an eye open for “green” product blueprints
(e.g. TAF/Tridel), as well as the quantitative and qualitative data (economic,
environmental and energy-related) emerging from novel pilots, will prepare some
banks to emerge as leaders in the growing “green” commercial building market.

Carbon Market

Capitalize on growing carbon markets. Carbon market products and services are
developing at an extraordinary pace, particularly among European and Japanese banks.
Many banks consider climate change as the most important environmental issue they
face. Setting up emissions trading desks; offering cutting-edge derivatives products
based on carbon assets; investing and buying credits from CDM and JI projects;
minimizing and offsetting the bank’s own GHG emissions are all likely to become
mainstream in one or two years among all major banks in Europe. For North American
financial institutions, an opportunity exists to capitalize on emissions trading markets
by becoming a “risk taker and market maker”113 in these rapidly expanding regional
and global areas. With North American carbon regulation still in limbo, the cap and
trade framework utilized by the EU ETS provides opportunities for North American
banks to learn from the practices and experiences of European financial institutions
before carbon regulations are implemented in the US and Canada. Most importantly,
learning how to identify and quantify forward revenue streams associated with
emissions trading will better position North American banks to exploit clean project
finance opportunities. A bank that familiarizes its stakeholders, in general, and
employees, in particular, with the complexities of the carbon market may improve its
reputation, while ensuring that future carbon market opportunities are accurately
identified and pursued.

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Clean Technology

Support the clean technology sector. Over the coming decades, tapping into clean
energy and environmental technology opportunities will continue to require innovative
financing packages, developed through a long-term lens. Along with the market
valuation of the environmental sector, global investment in clean technology
companies expanded rapidly in 2006. The Impax ET50 index, which tracks the largest
50 environmental businesses based on market capitalization (the amount of issued
shares multiplied by the share price), rose to just over US$120 billion in 2006, up from
$47.5 billion in 2005, and global venture capital and private equity investment in clean
technology firms and projects reached over $US7.1 billion, a US$4.4 billion increase
over 2005. By 2010, New Energy Finance predicts that the growing environmental
industry will see approximately US$100 billion in private equity deals around the
world.

“First Mover” Opportunity

Carbon Neutrality

Market the benefits of going carbon neutral, while selling products and services
required for customers to reach this ideal. Going carbon neutral, on a product or
corporate level, is becoming an accepted practice for many organizations and
individuals, while representing unparalleled opportunities for product development in
the retail banking space. Generally speaking, no other sector has the capacity to reach
such a diverse audience with this type of packaged emissions offset deal, nor is there
another sector as well connected to provide the real reductions necessary to make a
significant dent in global emissions. North America’s first banks to pursue corporate-
wide or product-focused carbon neutrality will likely achieve reputational benefits and
positive, widespread media exposure. Providing products or services that help
consumers and business entities reach carbon neutrality is a market in itself, which has
yet to be truly capitalized on. With these observations in mind, it is safe to

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assume that financial pioneers behind innovative offset-related packages will see
both reputational and financial gains over inactive competitors.

Stakeholder Alignment Opportunities

Manufacturers

Partner with contractors and manufacturers to offer green financial products, banks
become familiar with the entire product value chain; from beginning to end. This
enables the bank to tailor its product offerings to meet the long-term needs and goals
of its clients, while at the same time strengthening the client-institution relationship. A
perfect example of this approach is NRB’s Solar Power one-step residential financing
product; a collaborative initiative between the bank and a Californian solar installation
manufacturing firm.

Government
Align green financial product and service development with federal/state-led environmental
or energy policies, targets or incentives. For instance, NRB’s Solar Power Loan complements
California’s million solar roofs program, in which loan holders further benefit from the state-
led incentive solar incentive program. The collective public/private environmental and
economic goals will help share risk and resources between the state, bank, and solar power
manufacturers and contractors. At the same time, these different groups, in partnership, will
help deliver key environmental messages and products to a wider range of audiences.

Non-Governmental Organizations

Collaborate with reputable environmentally-oriented NGO organizations or academic

groups that focus on environmental issues to develop “green” financial products and
services. This approach can be through affinity relationships, supplementary items in
product packages, client seminars and workshops, or the development of
environmentally-friendly lending criteria. Banks currently pursuing this approach
include NRB and CFS.

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Marketing and Strategy Opportunities

“Green” Branding

Establish a structured branding approach to “green” financial products and services.

Historically, several financial institutions have undermined the power of their brand;
however, this is changing as top managers are uncovering its intangible value115.
According to the CEO of UniCredit, “Branding is crucial and able to inspire internal
and external attitude and behavior towards stakeholders: employees, customers,
shareholders, suppliers and local communities”. A structured “green” branding
approach, in which global business lines and brands are on one end and local branding
strategy are on the other, will play pivotal role in achieving customer loyalty and
acquisition, as well as ensure that such products are tailored to the specific needs and
demands of local communities. In addition, North American financial institutions
could consider family branding or co-branding a suite of “green” financial products
and services to strengthen stakeholder relationships and loyalty, such as Bendigo
Bank’s Green Generation or mecu’s goGreen banking product lines. The proper and
consistent branding of innovative products and services can play a powerful role in
overcoming knowledge and perception barriers sometimes faced by “green” offerings.

Employing Traditionally Successful Product Features

Understand and design “green” banking products like traditional banking products.
Why do customers opt for certain products over others? Reasons may include:
flexibility; user-friendliness; virtual access; ease of personal management; bundled
package options; or low-risk. These types of attractive product features should rest at
the core of any “green” financial design, in order to appeal to the widest group of
stakeholders possible.

Dismantling Barriers

Identify and address barriers (e.g., lack of product information, inflexibility, or

uncertainty on costs versus returns) to “green” financial product or service uptake. To
accomplish this, all business units and bank employees should be fully educated

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and well-versed on all environmental instruments and packages. This understanding

should include the potential savings and benefits (environment, energy and economic)
associated with each product and service, as well as which client types are best suited
to exploit these opportunities. Moreover, proactively engaging bank customers and
employees will play an important role in overcoming barriers to the uptake of “green”
banking product and service. Potential engagement techniques may include inviting
traditional consumer and business clients to participate in “green” seminars,
workshops and/or industry discussion forums. In terms of going beyond the traditional
banker-client relationship to break down perceptions/ knowledge barriers, consider the
case of NRB. Besides opening its doors to 200+ customers to learn about its LEED-
certified facility, NRB also invited some 20-25 conventional developers to a green
building seminar to learn about environmentally friendly building materials, practices
and potential cost savings.

Stakeholder Research

Undertake market research and analyzes on the environmentally-related needs and

desires of individual customer segments. This information can be used to ascertain
which customer segments are most likely to consider eco-products complementary to
their lifestyles, interests and financial goals. This data can also be complied into a
database, which is capable of generating timely green options/recommendations
(based on a client profile) for customers seeking various financial solutions.

Stakeholder Outreach and Marketing

Overcome perception barriers and stimulate demand for “green” products through
creative, educational marketing campaigns. Examples of notable initiatives, all of
which having been launched in recent months, include campaigns designed by
VanCity and Bendigo Bank. In marketing its Clean Air Auto Loans for hybrid vehicles,
VanCity currently runs billboard ads that present a car driving through a mountain
range, accompanies by the phrase: “No reason why a car loan can’t change more than
just your car”. And, in their television commercial for green home and car loans
marketed under their Green Generation family brand, Australia’s Bendigo Bank refers

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to the annual tones of carbon an average car emits. Following this message is an
announcement that Bendigo now offsets those carbon emissions by planting native
forests, once customers choose the Green Generation Auto Loan. The commercial’s
closing line reads: “Giving you a clearer conscience and a cleaner environment”.

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Green Bonds

Green bonds (also known as Climate bonds) are fixed-income financial instruments
(bonds) linked in some way to climate change solutions. Green bonds were created to
fund projects that have positive environmental and/or climate benefits Climate bonds
are a relatively new asset class, but they are growing rapidly. The total volume of
climate bonds was estimated at 160 billion of dollar on 2016; of which 70 billion were
issued in 2016.
History of Green Bonds:

Voters in the City of San Francisco approved a revenue bond authority in 2001, in the
form of a city charter amendment (Section 9.107.8) known as the "solar bonds," to
finance renewable energy and energy conservation measures on homes, businesses and
government buildings. The campaign for solar bonds, Proposition H, was motivated
by the need for the city to take meaningful action on climate change. The solar bond
authority was being used as part of the city's renewable energy program, administered
by the San Francisco Public Utilities Commission, CleanPowerSF.

European Investment Bank (EIB) issued an equity index-linked bond in 2007, which
became the first fixed income product among socially responsible investments. This
“Climate Awareness Bond” structure was used to fund renewable energy and energy
efficiency projects. Afterwards, The World Bank became first in the world to issue a
labelled “green bond” in 2008, which followed a conventional “plain vanilla” bond
structure, contrary to EIB’s equity-linked Climate Awareness Bond.

The green bond market has subsequently increased rapidly in issuance. From 2015 to
2016, the Climate Bonds Initiative reports that there was a 92% increase in green bonds
issuance to $92 billion, with different types of issuers starting to issue green bonds.
Apple, for example, became the first tech company to issue a green bond in 2016, and
Poland became the first sovereign country to issue a green bond at the end of 2016.

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Description:

Climate bonds are issued in order to raise finance for climate change solutions:
climate change mitigation or adaptation related projects or programs. These might be
greenhouse gas emission reduction projects ranging from clean energy to energy
efficiency, or climate change adaptation projects ranging from building Nile delta
flood defenses or helping the Great Barrier Reef adapt to warming waters.

Like normal bonds, climate bonds can be issued by governments, multi-national banks
or corporations. The issuing entity guarantees to repay the bond over a certain period
of time, plus either a fixed or variable rate of return.

Most climate bonds are asset-backed, or ringfenced, with investors being promised
that all funds raised will only go to specified climate-related programs or assets, such
as renewable energy plants or climate mitigation focused funding programs.

In their UNEP paper on investors and climate change, Mackenzie and Ascui
differentiate a climate bond from a green bond: “(A climate bond is) an extension of
the green bond concept. Green bonds are issued in order to raise the finance for an
environmental project. Climate bonds [are] issued to raise finance for investments in
emission reduction or climate change adaptation.”

The London-based Climate Bond Standards Board provides a certification program for
climate bonds.

Climate bonds are theme bonds, similar in principle to a railway bond of the 19th
century, the war bonds of the early 20th century or the highway bond of the 1960s.
Theme bonds are designed to:

 Allow institutional capital - pension, government, insurance and sovereign

wealth funds - to invest in areas seen as politically important to their
stakeholders that have the same credit risk and returns profile as standards
bonds.

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 Provide a means for governments to direct funding to climate change

mitigation. For example, this might be done by choosing to privilege qualifying
bonds with preferential tax treatments.
 Send a political signal to other stakeholders.

Otherwise, for operational purposes, theme bonds largely function as conventional

debt instruments. They are risk-weighted and credit rated in the usual way based on
the creditworthiness of the issuer, and tradable, market conditions permitting, in
international secondary bond markets. These instruments can theoretically be issued
at all levels of the fixed income market, from sovereigns to corporate.

Benefits of Green Bonds:

The growth of bond markets provides increasing opportunities to finance the

implementation of the Sustainable Development Goals, Nationally Determined
Contributions and other green growth projects. Green bonds are becoming an
increasingly prevalent form of green finance, particularly for clean and sustainable
infrastructure development and their large funding needs. They offer a vehicle to both
access finance from the capital markets and deliver green impacts that can be verified
against standards. In developing countries, green bonds are already financing critical
projects, including renewable energy, urban mass transit systems and water
distribution.

Green bonds mobilized over $93 billion in 2016 to projects and assets with positive
environmental impacts. At the current growth rate, they could mobilize over $200
billion in 2017. Of total global bond issuance, however, this is still around just 1%.

According to a report by the Climate and Development Knowledge Network

(CDKN) and PricewaterhouseCoopers, a green bond market has three key benefits to
a country and its environmental goals and commitments.

 It increases the finance available for green projects, therefore incentivizing an

increase in their number. Today, green bonds mainly finance projects within

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renewable energy, energy efficiency, low-carbon transport, sustainable water,

and waste and pollution.
 It is a viable vehicle for enabling the increasing pool of sustainable investors
to access environmental projects. Bonds are an instrument and an approach
with which foreign investors are familiar, so these institutions need little new
understanding or capacity. Investors are also interested in placing money where
the environmental impact achieved is highest per unit of currency, and
emerging and developing economies have the potential to offer this where
lower project costs exist.
 It can be a catalyst for further development of the domestic capital market and
financial system more broadly beyond environmentally related projects.
 Tax exempted investment option for an investor.

Demand for Green Bonds:

The Business and Sustainable Development Commission describes at least US$12

trillion in market opportunities for business from sustainable business models.

The United Nations estimates an annual funding gap of $2.5 trillion is needed for the
achievement of the Sustainable Development Goals (SDGs), and within this, US$1
trillion is needed annually for clean energy alone. A large number and broad range of
projects and assets that contribute to achieving the 17 SDGs need this funding for their
development and operation.

One of the SDGs where ‘green finance’ has been successfully mobilized is on clean
energy and climate action. The Paris Agreement on climate change entered into force
in November 2016, after 196 countries committed to reducing greenhouse gas
emissions. Significant quantities of finance are now needed to convert country
commitments (Nationally Determined Contributions, NDCs) to implementation and a
low-carbon, climate-resilient economy.

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Despite recent increases in volumes of climate finance, a significant funding gap will
arise unless new sources and channels of finance are mobilized.

Existing international public finance dedicated to climate change is unable to achieve

the rapid change required in meeting the finance gap alone. Furthermore, public sector
balance sheets do not have the capacity to fund the amounts needed, and so an
estimated 80–90% of funding will need to come from the private sector.

Bank balance sheets can take only a proportion of the private finance needed so the
capital markets have to be leveraged, along with other sources such as insurance and
peer-to-peer.

According to GUIDE: New markets for green bonds, the demand for green bonds has
grown quickly on the investor side, with asset owners and managers diversifying their
investment portfolios and seeking positive impact beyond financial return. In the light
of the global commitment to shift to a green and low-carbon economy, the green bond
market has the potential to grow substantially, while attracting more diverse issuers
and investors.

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Green Bonds in India

Need for Green Bonds in India:

India has set ambitious renewable energy goals to improve energy access and energy
security while taking action on climate change. India has embarked upon an ambitious
target of building 175 gigawatt of solar, wind and other renewable energy capacity by
Year 2022 and this requires a massive estimated funding of around USD 264 billion.

To scale the necessary finance to achieve these national targets, new innovative
financial instruments such as green bonds need to scale up. Therefore the objectives
should be to strengthen & expand market for green bonds in India with the aim to:

 Reduce the cost of capital,

 Stimulate demand from institutional and retail investors, and
 Expand and diversify the issuer and investor base.

Steps taken by SEBI:

SEBI initiated a consultation process for disclosure requirements for Public Issue and
Listing of Green Bonds and listing of privately placed Green Bonds. A concept paper
was placed on the SEBI website on December 03, 2015, for seeking public comments.
The disclosures were based upon the Green Bond Principles, 2015.

The brief details of the proposal made in the consultation paper are as under:

 Use of proceeds: issuers to define and disclose their criteria for what is
considered ‘green’ i.e. which projects, assets or activities will be considered
‘eligible’. Further broad categories of Green were also identified.
 Project evaluation and selection: details of the criteria for evaluating the
projects eligible for using the Green Bond proceeds and the details of the
process used/will be used to apply ‘green’ criteria to selected specific projects

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or activities. Further, issuer shall also disclose the environmental sustainability

objectives of the proposed assets/projects.
 Management of proceeds: details of the processes and controls, so as to ensure
funds are used only for the specified ‘green’ projects.
 Reporting: evaluation and reporting of progress, of the projects/assets to which
Green Bond proceeds have been allocated, against both environmental and
financial criteria's.

Yes Bank Green Bonds Impact:

With India’s first Green Bond issuance in February 2015, YES BANK pioneered green
financing in India, raising INR 10 billion for financing green projects. Thereafter, the
Bank issued an INR 3.15 billion Green Bond in August 2015 and an INR 3.3 billion
Green Bond in September 2016.

It is well-established that the solar and wind power plants help avoid emissions of
CO2, SO2, and NOx, among others. The green projects funded by the proceeds of YES
BANK’s Green Bonds would help reduce these emissions and would also contribute
to a positive environmental impact.

Given the Government of India’s focus on increasing renewable energy capacity to

175 GW by 2022, it was estimated that this sector would require significant financing.
Therefore, there was a need to evolve innovative instruments to finance projects in
renewable energy, and green infrastructure bonds seemed to be one such specialized
structure that could allow finances to flow to clean energy projects. Realizing the
potential of Green Bonds, YES BANK saw an opportunity to demonstrate this in a
developing economy. YES BANK has always adopted a proactive approach towards
growing its book in positive impact sectors (renewable energy is 4.8% of the advance
book in FY 2016-17). During the UN Climate Summit in September 2014, YES BANK
had committed to invest in 500 MW annually, which the Bank later revised to a 5,000
MW commitment over five years starting in February 2015.

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CO2 Emissions Avoided

Carbon dioxide, a greenhouse gas, is one of the primary pollutants of air. The 2
renewable energy projects such as the ones which received green bond proceeds from
YES BANK are instrumental in achieving reduction of carbon emissions in India. This
is in line with India’s commitment made during COP21 of reducing 33- 35% emissions
by 2030 over the 2005 levels. The annual and lifetime CO2 emissions that these
projects 2 would help avoid are 2.3 megatons and 55 megatons, respectively.

*Based on the methodology outlined in the document 'CO Baseline Database for the Indian
Power Sector: User Guide Version 11.0,April 2016' along with other relevant 2 factors such
as project PLF/CUF estimates, installed project capacity, resultant annual unit generation etc.

SO2 Emissions Avoided

Sulphur dioxide (SO2) is known to be deleterious to human health. It also causes acid
2 rains which can harm sensitive ecosystems. The projects financed by YES BANK’s
Green Bonds will potentially avoid Sulphur dioxide emissions, especially which would
have been contributed by conventional power plants. The projects

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would reduce (avoid) as much as 19 kilotons of SO2 emissions annually; lifetime

anticipated reduction being 454 kilotons.

**Based on the estimates from Emissions from Coal Fired Thermal Power Plants in India,
Department of Environmental and Occupational Health, University of Florida, Florida, USA.

Oxides of Nitrogen Avoided

Oxides of Nitrogen (NO2) are also major contributors to air pollution. These are
primarily X emitted by motor vehicles, the presence of which is exponentially
increasing in India. Other significant high emitters of oxides of nitrogen are
conventional power plants. Through the shift towards solar and wind electricity
generation projects, a considerable amount of oxides of nitrogen can be avoided, as
shown in the graph below. The annual emission of oxides of nitrogen that will possibly
be avoided through these projects is 5.7 kilotons. The potential lifetime emissions
avoided would be 136.7 kilotons.

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*Based on the estimates from Emissions from Coal Fired Thermal Power Plants in India,
Department of Environmental and Occupational Health, University of Florida, USA.

Fossil Fuel Usage Avoided

Employing renewable resources avoids usage of fossil fuels. Based on the generation
potential of the projects, around 204.5 kilotons of fossil fuel usage would be avoided
each year. The lifetime usage avoided is expected to be 4.8 megatons, as shown in the
graph below:

**Fossil fuel usage avoided in terms of equivalent

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Social Impact:

Solar and wind power plants not only have a positive environmental impact but also
strengthen a country’s energy security. The green projects funded by the proceeds of
Green Bonds issued by YES BANK will annually generate around 2.35 million MWh
of electricity. This volume of electricity can light up around 2.32 million households
in India, in a year.

Green Bonds are the next step towards the proliferation of renewable projects and can
act as catalysts for greening the country’s conventional practices including thermal and
hydro power generation. The projects funded by the Green Bonds issued by YES
BANK are expected to contribute towards climate mitigation and the country’s global
commitment of achieving 175 GW renewable energy capacity in the next few years.
YES BANK aims to continue its pioneering efforts of financing green projects and
would keep contributing towards India’s sustainability goals.

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Limitations

 Green financial products and services is a new concept in the market and hence

only limited data is available.

 Volume of Green bonds traded worldwide is relatively low at this moment.

Thus, effectively analyzing performance of Green bonds is not possible.

 This project is carried out by studying few articles and on the basis of available

information of encyclopedias. In depth analysis on this topic would require

industry experience.

 Green financial products and services market in India is relatively less

developed with compare to U.S., Europe and other developed economies.

Hence, analysis of certain products is done as per their performance in the

geography those products are traded in.

 Since these products are new, not many live examples are available for
analysis.

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Conclusion
 Many green financial products and services, reviewed above, either remain in
the nascent stage of development/implementation or data related to their
success/failure has not yet been generated or reported. Due to this lack of
experience and data, any rigorous measurement or ranking of these designs
would be overly speculative and risk misrepresenting some designs over
others.
 As environmental understanding and awareness grows worldwide, so too will
the demand for products and services aimed at facilitating the advancement of
environmentally sustainable lives, livelihoods and communities. At the same
time, this demand will also expose new business opportunities, while leading
to an increased diversification of products and services found in multiple
sectors.
 Consequently, organizations that have the foresight and capacity to tap into this
desire by consumers to affect positive environmental change will likely
experience widespread benefits; from improved corporate image to increased
growth and competitiveness in the marketplace. Given their intermediary role
in the economy and far-reaching customer base, financial institutions will be
well-positioned to reap financial and non-financial rewards, while furthering
their contribution toward sustainable development.
 Popularity of Green financial products including Green Bonds (also known as
climate bonds) is increasing rapidly.

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Recommendations

 Green financial services and products provide sustainability and therefore must be

promoted.

 Green financial services and products is another asset class for investors to invest in ,

investors who believe in environmental sustainability must invest in such products.

 Awareness of such products is very low , so these products must be promoted by various

means.

 Seminars and workshops should be conducted which will help investors understand the

benefits and teach them the mechanism to invest in such products.

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Bibliography

1. “Green bonds: a model to mobilize private capital to fund climate change

mitigation and adaptation projects” by Heike Reichelt, The World Bank.

http://worldbank.or.jp/debtsecurities/
2. “Green Bonds – A beneficial financing form” by Daniel Arvidsson, Royal Institute
of Technology, Sweden.

http://www.diva-portal.org/smash/get/diva2:1158542/FULLTEXT01

Information Provider and Regulatory Websites:

www.unepfi.org

www.sifma.org/research/statistics.aspx

www.sebi.gov.in/

Other websites and Encyclopedias:

https://en.wikipedia.org/wiki/Climate_bond

www.investopedia.com

www.unepfi.org/fileadmin/documents/greenprods

http://www.abnamro.com.au/content/media/articles/323.asp

https://www.climatebonds.net

https://www.yesbank.in/about-us/investor-relations/yes-bank-green-bond-impact-
report
https://www.bloomberg.com/graphics/2019-green-finance/

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