With the increased awareness of environmental issues, government regulations and policies, and the actions of individuals, organizations, and businesses, society has become more environmentally conscious. Over the past few decades, the world has witnessed the emergence of various means to move a step forward towards a sustainably developed future. In line with this shift, the world witnessed the surfacing of green bonds, a ray of hope towards a greener future.
The concept of green bonds emerged in the early 2000s, with the first green bond being issued by the European Investment Bank (EIB) in 2007. The EIB’s bond raised €500 million for renewable energy and energy efficiency projects. In the following years, the issuance of green bonds grew steadily, with more and more organizations, including governments, multinational corporations, and financial institutions, issuing green bonds to finance environmentally beneficial projects. As per a report published in 2020 by the Climate Bond Initiative, an investor-focused not-for-profit organization, the global green bond market reached $11 billion in 2013, and it has grown rapidly since then. According to the Research and Markets report, the estimated market value of global green bonds in 2021 was $436 billion.
Green bonds are the financial instrument used to raise finance for projects with positive environmental impact. Examples of such projects include renewable energy, clean transportation, and sustainable agriculture. The growth in green bonds globally over the years has been remarkable. With the increasing awareness of social responsibility, there has been a surge in sustainable investing. Here, green bonds come into play by offering investors a means to hedge against climate change risks while achieving at least similar, if not better, returns on their investment. Hence, people can help bring about change through investing. Such is the demand that it can cost less to issue green bonds than the conventional variety.
It is believed that green bonds are the future, as they can help mitigate the effects of climate change and promote sustainability. They can also provide financial benefits to investors, as many green bonds are considered low-risk investments with solid returns. It is so because green bonds are generally backed by governments or large corporations with strong credit ratings, and the coupon rate is predetermined. The purpose and impact of green bonds align with the surging demand from ESG (environmental, social, and governance) investors, leading to stable pricing and liquidity. One lesser-known fact about green bonds is that smaller companies and organisations can also issue green bonds to finance environmentally friendly projects, such as renewable energy or energy efficiency projects. This allows a wider range of investors to participate in the green bond market and support sustainable projects at all levels. Additionally, there are also green bond funds available for investors who want to invest in a diversified portfolio of green bonds. However, it is important to note that the definition of “green” and the projects that qualify as environmentally beneficial can vary between bond issuers. For example, building a sand dam may be considered a sustainable solution for water-scarce regions by some, while on the other hand, it may be considered harmful to the environment by others. Hence, what may be development for one may not be it for another. Therefore, it is crucial to do one’s own research and look at the bond’s prospectus to understand what the proceeds will be used for. To address this issue, various organizations, such as the International Capital Market Association (ICMA), have established green bond principles to provide guidance on what qualifies as a “green bond” and promote transparency and accountability in the market.
As the global economy continues to recover from the COVID-19 pandemic, there is likely to be increased investment in infrastructure, including sustainable infrastructure. Green bonds can play a key role in financing such investments by providing a dedicated source of funding for projects that have a clear environmental benefit. The Climate Bonds Initiative estimates that the annual issuance of green bonds can reach $1 trillion in 2023, which is a significant milestone. Despite this growth, the green bond market remains a small portion of the overall global bond market, estimated to be around $119 trillion worldwide, according to the Securities Industry and Financial Markets Association (SIFMA), indicating that there is potential for further expansion in the future.
Though green bonds are a promising tool for financing environment-friendly projects and technologies, they are not without their limitations. There is currently no standard definition or set of guidelines for what constitutes a “green” project or investment. This can make it difficult for investors to accurately assess the environmental impact of a green bond. The reporting and disclosure of the use of proceeds from green bonds are not always transparent and consistent, making it difficult for investors to verify the environmental impact of their investments. However, some countries have established statutory reporting rules regarding green bonds. For example, the China Securities Regulatory Commission issued guidelines for the issuance and trading of green bonds, encouraging the Shanghai Stock Exchange and Shenzhen Stock Exchange to set up green bond lists and develop green bond indices to further boost China’s green bond market. In January 2016, the Securities and Exchange Board of India published its official green bond requirements for Indian issuers. In 2017, the Japanese Ministry of Environment published Japan’s Green Bond Guidelines. The EU’s Taxonomy Regulation lays out sustainability criteria for green bonds, and the EU Action Plan on Sustainable Finance establishes guidelines for reporting on the use of proceeds.
Despite its shortcomings, such as the lack of standardisation and the potential for “greenwashing,” i.e., false promotion as being environment-friendly or sustainable, green bonds have gained popularity because they provide a way for investors to align their investments with their environmental values and for companies and governments to access capital for projects that have a positive impact on the environment. Regulators and the industry are working hard to address this issue. Additionally, if the bond issuer has a robust process in place for verifying the environmental impact of the projects being financed, it can help to ensure that the proceeds are truly being used for environment-friendly purposes.
In India, the first green bond was issued in 2017 by the Indian Renewable Energy Development Agency, a government-owned organization. Since then, several other organisations have followed suit, including the National Bank for Agriculture and Rural Development and the Housing and Urban Development Corporation. As of 2021, India has become one of the largest issuers of green bonds in the world, with a large number of public sector banks, private sector banks, infrastructure companies, and other financial organisations issuing green bonds to fund various green projects. According to Mr Pankaj Chaudhary, Union Minister of State for Finance, India is ranked second after China among the emerging market economies in terms of the issuance of green bonds.
The future of green bonds in India looks promising, as the country looks to transition to a more sustainable and environmentally friendly energy mix. The Indian government has set ambitious targets for increasing the share of renewable energy in the country, and green bonds can play a key role in helping to finance these projects. The Reserve Bank of India has also taken steps to promote the development of the green bond market in India, such as by issuing guidelines for green bond issuances. For example, SGrBs (sovereign green bonds) will be designated as specified securities under the “Fully Accessible Route” for investment in government securities by non-residents. In order to issue and list any “green bonds” or “green debt securities,” an issuer had to comply with (i) the Companies Act, 2013; (ii) the SEBI (Issue and Listing of Debt Securities) Regulations, 2008; and (iii) the SEBI (Listing Obligations and Disclosure Requirements), 2015, all of which apply to debt instruments. The Securities and Exchange Board of India (SEBI) has also issued regulations for the issuance and listing of green bonds. The issuer must comply with the disclosure requirements under these regulations. However, there is a need for clear definitions and specific disclosure requirements for Green Bonds to ensure proper management of proceeds and reporting. Additionally, Indian companies are increasingly recognising the importance of environmental sustainability and are looking to invest in green projects, which will also drive demand for green bonds. The Indian government has also been actively promoting the use of green bonds as a means of raising funds for environmentally friendly projects.
In November 2021, the government of India released the sovereign green bond framework, drawing a blueprint for investments in the green sector. The framework includes guidelines for the eligibility of projects and the use of proceeds, as well as reporting and disclosure requirements. It also includes a system for independent third-party review and certification of the environmental impact of projects, as well as a requirement for annual reporting on the use of proceeds and the environmental impact of the projects financed by the bonds. This will increase transparency and accountability in the market.
The Reserve Bank of India has announced that it will issue sovereign green bonds worth INR 160 billion (approximately $2.2 billion) in two tranches of INR 80 billion (approximately $1.1 billion) each in the current financial year. This is a significant increase from the previous announcement of a single tranche of INR 80 billion worth of green bonds. This move by the RBI is a significant step towards promoting sustainable financing in India and will help attract more investment in the renewable energy sector and other environmentally friendly projects. By issuing green bonds in two tranches, the central bank is also providing more opportunities for investors to participate in the market and providing a more stable supply of green bonds. The auction of the first tranche of green bonds is expected to provide a benchmark rate for the pricing of future green bond issuances in India.
In conclusion, the growing demand for sustainable investments, government policies and regulations, high creditworthiness of issuers, increasing investor appetite, and the transition to a low-carbon economy are likely to drive the continued growth of the green bond market in the future. It is worth noting that while green bonds can be an effective tool for promoting environmental sustainability, they are not a panacea. It is important to use green bonds in combination with other policy tools and to have proper oversight and monitoring mechanisms in place to ensure that the proceeds are used for their intended purpose. Hence, green bonds can play an important role in financing environmentally beneficial projects, but they are not a substitute for the fundamental shift in the economy towards a circular economy and away from a linear economy. The linear economy operates under a “take, make, waste” model where the focus is solely on profitability, regardless of the product’s life cycle and its impact on the environment. In contrast, the circular economy prioritises sustainability, advocating for keeping resources in use for as long as possible, reducing waste and pollution, and regenerating natural systems. It aims to create a closed-loop system where waste and by-products are minimized, and resources are reused and recycled. Hence, by transitioning to a circular economy, environmentally conscious citizens can create a more sustainable future for the planet and its inhabitants.
By Nidhi Singh