Following a record-breaking year in 2021, India’s green bond issuance is expected to establish a new high in 2022.
Experts predict that corporate and bank issuers in India will become increasingly active in the climate-related debt market since the world’s third-largest emitter of carbon dioxide may require as much as $10 trillion to become carbon-neutral by 2070. More issuers will look to the offshore market, which has a larger and more diverse pool of environmentally conscious investors.
According to Climate Bonds Initiative, a U.K.-based green bond tracking firm, India issued $6.11 billion in green bonds in the first 11 months of 2021. It was the most successful year since the country’s first green bonds were issued in 2015.
“As Indian corporations grow more concerned of their carbon footprint, we expect 2022 to be another fantastic year for issuance of these bonds,” said Nidhi Sharma, director of investment strategy and products at LC Capital India, an investment management firm.
According to Sivananth Ramachandran, director of capital markets policy, India, CFA Institute, banks would likely increase green debt issuance to fund their growing lending program to speed India’s energy transition. According to the Climate Bonds Initiative, nonfinancial corporations issued 94 percent of green bonds in the first 11 months of 2021.
“With banks still controlling a large portion of lending and pressure on them to speed up financing to sustainable projects, it may only be a matter of time before more of them become active issuers of green bonds,” Ramachandran added.
Experts predict that more Indian issuers will turn to the offshore bond market to tap into a larger and deeper capital pool outside of their native nation.
“While onshore green financing in India has grown significantly since its modest beginnings in 2004, financing net-zero for the world’s third-largest emitter will require access to the deep pool of capital that exists offshore,” said Mitch Reznick, head of sustainable fixed income at Federated Hermes, a U.S.-based investment manager.
Due to relatively favorable valuations and reasonable economic growth prospects, green bonds issued by emerging nations such as India have a tremendous appeal to overseas investors, according to Reznick.
According to a Nov. 18 report by the Council on Energy, Environment and Water Center for Energy Finance, or CEEW-CEF, an Indian think tank, offshore funding could help bridge the $3.546 trillion gap between the total investment required to achieve net-zero and the amount that can be reasonably contributed by domestic banks, nonbank financial companies, and capital markets.
According to the CEEW-CEF, India will need to invest $10.103 trillion by 2070 to achieve carbon neutrality. According to the think tank, India’s coal-dependent power sector will require $8.412 trillion in renewable energy sources, with another $1.494 trillion needed to develop carbon capture and storage and green hydrogen technology.
“The total investments required for net-zero society could be greater than India’s current GDP. As a result, there should be some financing gaps.”
Who is eligible to issue green bonds?
Green bonds are quickly becoming the preferred investment mechanism for the private and governmental sectors to fund projects that benefit the environment, such as sustainable energy, low-carbon transportation, and energy-efficient buildings.
Green bonds have proven to be popular among a rising number of investors seeking sustainable investment options, and they are frequently oversubscribed. It’s no surprise that the designated green bond market surged by nearly 80% between 2016 and 2017, with a total of US$155 billion in bonds issued in 2017. 1
While most green bonds are issued by banks, firms are increasingly issuing their own bonds. Among the companies that have done so are those in the technology, utility, automotive, and consumer products sectors.
Green bond issuers face hurdles and uncertainties in addition to the benefits, as the market is still developing (the first green bond was issued in 2007). Expert counsel or independent assurance can help many organizations avoid mistakes and increase the credibility and attraction of their bonds.
In India, can private banks issue green bonds?
Green bonds have a greater cost of issuing than other corporate or government bonds, and they are frequently issued by public businesses or private companies with better financial health (Green Finance in India: Progress and Challenges, RBI Bulletin January 2021).
Green bonds can be issued by private firms.
The US Treasury and the European Union have explored issuing new green bonds to fund recovery from the COVID -19 pandemic, after $1 trillion in “green bonds” had passed through the world’s development banks, bond markets, and corporate balance sheets since 2008.
You might be wondering why green bonds are important. It’s not like I’m putting money into the World Bank or the European Investment Bank. What impact does this financial innovation have on me or my business?
Green bonds are now included in most climate-finance scenarios as their volume grows. To raise funds for climate mitigation and attract new shareholders, several private and public companies are issuing their own green bonds. Germany, France, and the Netherlands are among the countries that have lately issued sovereign green bonds. Many energy or utility firms throughout the world have also issued their own green bonds to fund renewable energy projects. Many investors are still hesitant to participate in green bonds because of the opaque ways in which corporations might use the money they raise.
Without proper government rules, any corporate or public entity in the United States of America can issue green bonds and avoid being fined if the cash raised are not used for ecologically favorable projects. This lack of rules for value, validity, and structure should cause some concern among new investors and issuers. Many governments are also issuing green bonds before deciding what constitutes a green bond or a bondable green investment.
Through YES Bank, a private banking organization, India became the first country in South Asia to introduce green bonds in 2015. YES Bank issued its first round of green bonds, totaling $67 million, to fund ecologically beneficial initiatives. It also issued $81 million in green bonds for China Light and Power (CLP), one of the world’s largest utility corporations, in India. CLP India raised $81 million to build the Rampur Hydropower Project in northern India, which delivers energy. It currently generates roughly 2 gigawatts per year. Following these efforts, the Indian government developed green bond criteria based on the InternationalMarket Association’s green bond principles (ICMA).
Who are the buyers of green bonds?
Calvert’s Green Bond Fund, the market’s largest green bond fund, invests in bonds deemed “green” by Calvert’s investing team. Bonds that finance specific environmental projects, as well as bonds issued by environmental leaders, fall into this category.
Calvert’s fund is quite large, with over $900 million in assets, thanks to its broader bond inclusion criteria. The portfolio has around 190 holdings, the majority of which are investment-grade bonds. France, Apple, Bank of America, and TerraForm Power, a solar and wind-powered utility, are among the top issuers.
Calvert is one of the most well-known ESG asset managers. The Green Bond Fund is managed actively and costs a fee of 0.73 percent. A $1,000 investment in Class A shares is required.
Companies issue green bonds for a variety of reasons.
Green bonds, which finance ecologically beneficial initiatives, are becoming more popular as firms face pressure from investors, authorities, and employees to demonstrate their commitment to environmental improvement. One method they achieve this is by issuing debt that is linked to long-term sustainability goals.
In India, who issued the first green bond?
Electricity Finance Corporation Ltd (PFC), the major NBFC in the power sector, has successfully issued its first Euro Green Bond. The bond, which has a maturity of seven years and a face value of 300 million euros, has been priced at 1.841 percent.
In India, what kinds of green bonds are available?
Governments, foundations, banks, and private investors can support “green” initiatives using a variety of methods. Grants, risk-mitigation instruments, equity, and debt are the four types. Global foundations and NGOs typically provide project-specific grants, such as for decentralized solar mini-grids for rural electrification. Credit enhancement guarantees and insurance products are examples of risk-mitigation instruments. Guarantees are assurances given to lenders by government organizations, development finance institutions (DFIs), or financial services businesses that cover a portion or the whole payment in the event of a default by the borrowers. Environmental risk liability coverage and indemnification against climate/ecological losses are provided by green insurance products. DFIs can provide early-stage seed financing to establish a project using equity. In addition, venture capitalists and private equity funds can invest in such projects/assets in exchange for a share of ownership, or the general public can invest through initial public offerings (IPOs).
Green loans and green bonds are the two main types of debt securities. Green loans are only available from banks, whereas green bonds, sometimes known as climate bonds, can be issued to the general public. The holder of a bond is the lender, the issuer is the borrower, and the return to the lenders is fixed interest payments. Green bonds have gained the most traction among all green finance vehicles. Global green bond and loan issuance surged 51% year on year to $257 billion in 2019, according to the Climate Bonds Initiative (CBI), an international non-profit organization.
According to the Economic Survey 2019-20, India has one of the fastest-growing green bond markets in Asia, with $10.3 billion in green bond transactions in the first half of 2019. As previously said, green bonds are similar to regular bonds in that the proceeds are designated towards specific “green” projects or assets, i.e. climate-friendly initiatives or assets. Green bonds are classified as organization-guaranteed bonds, asset-backed bonds, or hybrid bonds, depending on the source of repayment for the lenders and the remedy available in the event of a default. Let’s imagine a company offers bonds to fund the construction of a solar farm.
What are Upsc green bonds?
The Finance Minister recently revealed in Budget 2022 that the government intends to sell sovereign green bonds to raise funds for green projects.
- The proceeds will be used to fund public-sector programs that reduce the economy’s carbon intensity.
- The announcement coincides with India’s goal of achieving net-zero carbon emissions by the year 2070.
What are Green Bonds?
- Companies, nations, and multilateral organizations issue green bonds to fund projects that have positive environmental or climate effects while also providing investors with a guaranteed income payment.
- Renewable energy, clean transportation, and green buildings are just a few examples of possible initiatives.
- The proceeds from these bonds will be used to fund green projects. Unlike regular bonds, the proceeds of which can be used for a variety of reasons at the issuer’s choice.
- Since its beginning in 2007, the international green bond market has seen issuance totaling more than USD 1 trillion.
What is the Significance of Sovereign Guarantee to Green Bonds?
- Sovereign green issuance sends a strong message to governments and regulators about climate action and sustainable development.
- It will boost domestic market development and provide institutional investors a boost.
- It will give local issuers with benchmark pricing, liquidity, and a demonstration effect, assisting in the creation of a local market.
- With the IEA’s World Energy Outlook 2021 estimates that emerging/developing economies will need to spend 70% of the additional USD 4 trillion needed to attain net-zero, sovereign issuance can help launch these significant inflows of cash.
Are green bonds safe to hold?
Green bonds function in the same way that any other company or government bond does. Borrowers issue these securities to acquire funding for projects that will benefit the environment, such as ecosystem restoration or pollution reduction. When these bonds mature, investors can expect to make a profit. Furthermore, there are frequently tax advantages to investing in green bonds.