All you need to know about green bonds
During her Budget 2022 speech, the honourable Finance Minister Nirmala Sitharaman announced that India would issue sovereign green bonds as part of the Government's overall market borrowings. She said the Government would mobilise resources by issuing green bonds for green infrastructure. The Government will deploy money in public sector projects that help reduce the economy's carbon intensity. This article will focus on all you need to know about green bonds.
What are green bonds?
The International Capital Market Association (ICMA), in their "The Green Bond Principles" report, has defined green bonds as follows: "Green Bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the Green Bond Principles (GBP)".
The four core components of GBP include:
- Use of proceeds: The proceeds of green bonds should be used for green projects with clear environmental benefits such as climate change adaptation or mitigation, natural resource and/or biodiversity conservation, pollution control and prevention, etc.
- Process for project evaluation and selection: The organisation raising funds should clearly inform investors about their project fits within the green project categories.
- Management of proceeds: The proceeds should be credited to a separate account, and the organisation should track their usage for green projects. They may appoint an auditor to verify the usage of funds.
- Reporting: The organisation should make and keep up-to-date information on the usage of funds in the form of reports. The annual report should mention about green projects and their impact.
SEBI guidelines on green debt securities
In May 2017, SEBI issued the "Disclosure Requirements for Issuance and Listing of Green Debt Securities". As per SEBI guidelines, a debt security shall be considered as "Green" or "Green Debt Securities", if the funds raised through the issuance of the debt securities are to be utilised for project(s) and/or asset(s) falling under any of the following broad categories:
- Renewable and sustainable energy, including wind, solar, bioenergy, other sources of energy that use clean technology, etc.
- Clean transportation, including mass/public transportation, etc.
- Sustainable water management, including clean and/or drinking water, water recycling, etc.
- Climate change adaptation
- Energy efficiency, including efficient and green buildings, etc.
- Sustainable waste management, including recycling, waste to energy, efficient disposal of wastage, etc.
- Sustainable land use, including sustainable forestry and agriculture, afforestation, etc.
- Biodiversity conservation
Green Bond market in India
In India, the first green bond issue was done by Yes Bank in 2015, in which it raised Rs. 500 crores. The bank used the money to fund clean energy (solar, wind, hydropower projects). The green bonds had a 10-year tenure and were listed on the Bombay Stock Exchange (BSE) with a coupon rate of 8.85% per annum.
Since the first issue, the issuance of green bonds has picked up in India in the last few years. In 2021, green bonds worth USD 6.11 Billion, the highest ever in a year, were issued.
With the Central Government announcing the issuance of green bonds in 2022, the overall market for green bonds is set to expand in India.
Projects for which green bond proceeds can be used
Some of the projects for which green bond proceeds can be used include:
- Renewable energy
- Energy efficiency
- Pollution prevention and control
- Environmentally sustainable management of living natural resources and land use
- Terrestrial and aquatic biodiversity conservation
- Clean transportation
- Sustainable water and wastewater management
- Climate change adaptation
- Eco-efficient and/or circular economy adapted products, production technologies, and processes
- Green buildings
India’s commitments to tackling climate change
India is a part of the Paris Agreement, a legally binding international treaty on climate change, adopted at COP21 in 2015. One of India’s goals is to increase electricity generation from fossil-free resources to 40% by 2030. To achieve this goal, India is planning 450 GW of renewable energy by 2030.
In 2021, at the COP26 climate change conference in Glasgow, Prime Minister Narendra Modi announced that India will achieve net-zero emissions by 2070. Both the above commitments made by India will require trillions of dollars in investment. Green bonds will play an important role in raising resources for the above commitments to tackle climate change.
Green bonds issued by Indian organisations
Keeping India’s climate change commitments in mind, organisations in various sectors are already working towards raising funds by issuing green bonds.
Green bonds issued by Indian companies
The above table shows that various organisations have raised money by issuing green bonds. Some of these include municipal corporations, banks, and corporates. The purposes for which they raised funds include water management, hydro projects, solar projects, etc.
Green bonds are the future in India and globally
Climate change is for real. In recent years, we have seen disastrous effects in the form of floods, droughts, cyclones, rising air pollution, water pollution, etc. For India and other economies globally, tackling climate change is a priority. It will require investment in trillions of dollars to tackle change. Green bonds, along with other securities, can be used to raise funds for this purpose.
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