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Green Bond

Prof. Priyanka Kumari

A bond is a debt instrument with which an entity raises money from investors. The bond issuer gets capital while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid. In a green bond, the issuer of a green bond publicly states that capital is being raised to fund ‘green’ projects, which typically include those relating to renewable energy, emission reductions and so on. Green bonds are issued by multilateral agencies such as the World Bank, corporations, government agencies and municipalities

Significance of Green Bonds to the World

At the twenty-first Conference of the Parties to the United Nations Framework Convention on Climate Change (COP-21) in Paris, the nations of the Earth agreed on a new framework to address the challenges of climate change. Countries agreed to work towards limiting the increase of the Earth’s temperature to 2° Celsius by 2050 and to pursue the goal of restricting global temperature rises to no more than 1.5° Celsius above pre-industrial levels.

Capital investments on a very large scale are needed to fund the acquisition and deployment of assets having environmental benefits including climate change mitigation and adaptation. Green bonds have been identified by the investment community as an effective instrument for financing the transition to a low-carbon economy. It is an opportunity to channel investment away from fossil fuel risk and into more sustainable infrastructure needed to support this transition.

Poland was the first country to enter the green bond market with a more modest 750 million euro issue in December 2016. Previously they had only been issued by companies or finance institutions such as the World Bank. In January 2017, France issued its first green bonds with seven billion euro sale, paving the way for the establishment of a genuine market in renewable energy bonds.

Significance of Green Bonds to India

India has embarked on an ambitious target of building 175 gigawatt of renewable energy capacity by 2022 from just over 30 gigawatt now. This requires a massive $200 billion in funding. But due to higher interest rates and unattractive terms under which debt is available in, the cost of renewable energy is raised by 24-32 per cent compared to the U.S. and Europe. Also, Renewable energy is still part of the larger power/infrastructure funding basket in most banks, and with most financing going towards coal power projects, there is very little funding left for renewable energy

Green bonds typically carry a lower interest rate than the loans offered by the commercial banks, which also makes it carry lower risks. In July 2017, India's leading clean energy company Greenko raised $1 billion in an overseas debt sale, making it Asia’s largest green bond offer to date and the world’s largest high-yield corporate issue by a closely held company.