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PAISE
Public Analysis of Investments and Sustainability Evaluation
Green Bonds
Paise
July 21, 2023
5:47 pm

Genesis

The emergence of green bonds goes back to the 2007 Intergovernmental Panel on Climate Change report that connects human action to global warming. The climate change risks were called out in the report. This led to the Swedish pension fund, World Bank and  Centre for International Climate and Environmental Research (CICERO) collaborating to establish a process for the debt markets to be part of the solution.

 

To supply investment for sustainability with positive environmental outcomes, a set of eligibility criteria were determined. The first green bonds were issued by the European Investment Bank and World Bank in 2007. This formed the framework for the green bond market where criteria for issuance, reporting and other review systems were established with the support of agencies like CICERO. The  International Capital Markets Association established the Green Bond Principles to further develop transparent guidelines for investors to support climate solutions.

What are green bonds?

Green bonds are financial instruments that are designed to fund environmentally sustainable projects. These bonds are similar to traditional bonds in that they are debt securities issued by companies, governments, or other entities to raise capital. However, the key difference is that green bonds are specifically used to finance projects that have positive environmental benefits, such as renewable energy, clean transportation, sustainable agriculture, and waste management.

 

The working of green bonds is relatively simple. The issuer first identifies a green project that they wish to finance, such as a wind farm or a solar power plant. They then issue a green bond, which is marketed to investors as a debt security that is used to fund the green project. The proceeds from the green bond are then allocated exclusively to the green project, which must be independently verified as meeting certain environmental standards, such as those set by the Climate Bonds Initiative or the Green Bond Principles.

 

Investors who purchase green bonds benefit from the traditional features of a bond, such as fixed income, predictable cash flows, and capital preservation. However, they also benefit from the knowledge that their investment is contributing to positive environmental outcomes, which can be attractive to socially responsible investors. Green bonds can be purchased by a range of investors, including institutional investors, retail investors, and even governments.

 

The green bonds are generally associated with

  • The kind of projects that are used to finance or refinance that enable decarbonisation or adaptation and resilience to climate change. They include Renewable energy, mass transportation, sustainable water, and waste management
  • A specific process and governance mechanism that bonds need to go through to qualify for ‘green label’ verified by an external agency.

The Green Bonds Framework is a process document which captures every element of the bond process including its eligibility criteria and other verifications. There are two stages

  • pre-issuance: the use of proceeds, selection of projects and assets, management of proceeds and external review
  • post-issuance: includes audit, review and reporting.

Processes

The framework is a public document that is built in for all bonds which are issued. There are no uniformly defined norms for the framework, but they follow the climate bonds standard, which has four important steps

  • Preparation- The bond issuer provides a complete overview including the decision-making process, eligibility criteria for the project and asset selection. This will be an information pamphlet for the prospective investor.

  • Use of Proceeds- The proceeds of the fund are to be used for green projects and assets. It is important to identify the category of green that are eligible for inclusion in the bond. In order to be eligible for finance or refinance, the alignment should be with Green Bond Principles or Climate Bond Taxonomy.

  • Selection of projects and assets on the basis of internal governance mechanisms. In some cases, committees are appointed to screen the proposals as per the criteria disclosed in the Proceeds section. Based on the assessment the committee would then recommend the proposals to the decision-making body for final approval.  The selection process is transparent to ensure the investors are aware of the robust internal processes.

  • External review is a process to make an assessment by an external auditor of the green credentials of the bond. They include in the form of a) second party opinions through independent research assessments b) assurance where third-party agencies like the Climate Bonds Initiative. The external review process is either while or soon after the issue bond framework. The reviews are made public before the roadshow to promote green credentials. It’s a common practice for an independent review to accompany the bonds’ prospectus and be sent to potential investors.

 Post-Issuance Audit- The bond issuers may decide to engage external reviewers at the post-issuance stage. This would be similar to a second party opinion model, and mandatory under the Climate Bonds Standard and Certification Scheme. Investor reports may also be undertaken periodically to provide confidence over the performance indicators being met.

 

The increase in the issuance of green bonds reflects the willingness to showcase environment-friendly and conservation initiatives to combat global warming. The sectors of building/construction, energy and transport are seeing multiple projects and accelerated growth, which is shaping a positive trend. Many countries like Brazil, India, Japan and Morocco are already developing their own guidelines and regulatory systems.

 

Use of Proceeds of Green Bonds, 1H 2020

 

 

Source: CFA Institute 

Green Bond Issuances, 2014–1H 2020 

Source: CFA Institute

Green Bond Principles:

International Capital Market Association (ICMA) Green Bond Principles (GBP) is a set of voluntary guidelines to issue green bonds.  It recommends transparency and disclosure towards the promotion of integrity in the development of the green bond market. It provides issuers with key components involved in launching a credible green bond; aids investors in the promotion of available information to evaluate the environmental impact of green bond investments; assists the underwriters in providing vital steps for facilitating the transactions.

 

The GBP explicitly recognises several categories for green projects that contribute to environmental objectives like climate change mitigation; climate change adaptation; natural resource conservation; biodiversity conservation; and pollution prevention and control. Following are some of the categories-

  • Renewable energy (including production, transmission, appliances and products)
  • Energy efficiency (such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances and products)
  • Pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy/ emission-efficient waste to energy)
  • Environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart farm inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes)
  • Terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine and watershed environments)
  • Clean transportation (such as electric, hybrid, public, rail, non-motorised, multi-modal transportation, infrastructure for clean energy vehicles and reduction of harmful emissions)
  • Sustainable water and wastewater management (including sustainable infrastructure for clean and/or drinking water, wastewater treatment, sustainable urban drainage systems and river training and other forms of flooding mitigation)
  • Climate change adaptation (including efforts to make infrastructure more resilient to impacts of climate change, as well as information support systems, such as climate observation and early warning systems)
  • Circular economy-adapted products, production technologies and processes (such as the design and introduction of reusable, recyclable and refurbished materials, components and products; circular tools and services); and/or certified eco-efficient products
  • Green buildings that meet regional, national or internationally recognised standards or certifications for environmental performance.

 Types of Green Bonds

  • Standard Green Use of Proceeds Bond: an unsecured debt obligation with full recourse-to-the-issuer only and aligned with the GBP.

  • Green Revenue Bond: a non-recourse-to-the-issuer debt obligation aligned with the GBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds goes to related or unrelated Green Project(s).

  • Green Project Bond: a project bond for a single or multiple Green Projects) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the GBP.

  • Secured Green Bond: a secured bond where the net proceeds will be exclusively applied to finance or refinance either: (1) The Green Projects) securing the specific bond only (a "Secured Green Collateral Bond"); or (2) The Green Project(s) of the issuer, originator or sponsor, where such Green Projects may or may not be securing the specific bond in whole or in part a "Secured Green Standard Bond"). A Secured Green Standard Bond may be a specific class or tranche of a larger transaction.

Green Bonds Issued in India


  1. Yes Bank - US$260 million green bond issued in February 2015

  2. Axis Bank - US$500 million green bond issued in May 2016.

  3. NTPC - US$300 million green bond issued in August 2016.

  4. Greenko- US$500 million green bond issued in August 2016. Assurance statement

  5. RECL- US$ 450 million green bonds issued in July 2017

  6. Indian Renewable Energy Development Agency- US$ 300 million through green masala bond in October 2017

  7. Tata Cleantech Capital - US$31 million green bond issued in September 2019.

  8. Hero Future Energies - US$150 million green bond issued in September 2019.

  9. Azure Power - US$350 million green bond issued in October 2019.

  10. Adani Green Energy - US$500 million green bond issued in January 2020.

  11. NTPC - US$450 million green bond issued in August 2020.

  12. Greenko Energy Holdings - US$1 billion green bond issued in October 2020.

  13. Sterlite Power Grid Ventures - US$550 million green bond issued in October 2020.

  14. Adani Transmission - US$500 million green bond issued in December 2020.

  15. Renew Power - US$450 million green bond issued in February 2021.

  16. State Bank of India - US$650 million green bond issued in November 2021.

  17. Government of India- Rs. 16,000 cr.  the green bond issued in February 2023.

  18. RECL- US$ 750 million green bonds issued in April 2023

In order to scale up environmentally sustainable investments, India joined the International Platform on Sustainable Finance (IPSF) in October 2019. IPSF acknowledges the global nature of financial markets which can help finance the transition to a green, low carbon and climate-resilient economy by linking financing needs to the global sources of funding.

India and forty-three other governments have raised green, social, sustainable, sustainability-linked (GSS+) debt. In just six years, they have raised up to US$323.7 billion, tapping into the rapidly growing global thematic bond market. From a few billion a decade ago to over $3.5 trillion now, this presents a huge opportunity to mobilise large-scale green investment. India mobilises green finance worth $44 billion annually, which is less than a quarter of what it requires to meet its 2030 targets, and it will need $3 trillion to plug the financing gap to reach net zero[1]

 

Sovereign Green Bonds India: In January 2023, the Government of India launched and sold its first-ever Sovereign Green Bond issuance for Rs80 billion ($1 billion); with half in five-year bonds at a coupon rate of 7.1% and the other half in 10-year bonds at a coupon rate of 7.29%. The auction for the second issuance took place in February 2023, and raised an equivalent amount, for a total of Rs160 billion, or $2 billion.

The central government will fund or refinance expenditures (in whole or in part) for green projects falling under "Eligible Categories" using the money raised from Sovereign Green Bonds (SGrBs). These include-

1. Renewable energy

2. Energy efficiency

3. Clean Transportation

4. Climate change adaptation

5. Sustainable water and waste management

6. Pollution prevention and control

7. Green buildings

8. Sustainable management of living natural resources and land use

9. Terrestrial and Aquatic Biodiversity Conservation[2]

The use proceeds from the sovereign green bonds issued are earmarked for expenditures in grid-scale solar and wind, decentralised solar such as solar water pumps for agriculture, green hydrogen, metro lines and afforestation[3]

 

Some of the areas where the proceeds from green bonds are to be utilised like metro lines and green hydrogen are of serious concern over their linkage with fossil fuel technology. 

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