A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects.
A fixed-income instrument or fixed income securities is a debt instrument issued by a government, corporation or other entity to finance and expand their operations. It provides investors a return in the form of fixed periodic payments and eventual return of principal at maturity.
The capital raised through green bonds finances:
- projects aimed at energy efficiency,
- pollution prevention, sustainable agriculture,
- fishery and forestry,
- the protection of aquatic and terrestrial ecosystems,
- clean transportation,
- clean water, and sustainable water management.
- cultivation of environmentally friendly technologies and the mitigation of climate change.
Financial Institutions are the greatest issuer of Green Bonds out of those the pioneer in the field, the World Bank issues the largest number of these bonds.
Green Bonds are tax exempted and hence offer incentives to the investors as opposed to taxable bonds.
Growth In Green Bond Market
Green Bonds were first issued in 2008 by the World Bank. Corporates started joining the green bond scheme in 2013 which led to its overall growth. For the year 2012 the Green Bond Market Share was only $2.6 billion but for 2017 the issuance of Green Bonds amounted to $161 Billion. The Climate Bonds Initiative, an international, investor-focused not-for-profit organization, puts the figure at $257.5 billion for the year 2019. The same organisation,in the 13 years since market inception, have calculated the average annual growth rate of the green bond market.at approximately 95%.
India favoring Green Bond Investment
India has tough targets to meet when it comes to environmental restoration. Over the years the government has introduced various legislations and courts have delivered helpful Judgements to tackle the all evasive evil of pollution.
Green Bonds might be the solution to the financial aspect of taking the green road to India’s development.
India has only recently made its debut in the green bond market and has been lauded for its commitment to ensure that projects financed by green bonds actually accomplish the “green” goals they outline.
Yes Bank was the first bank to come out with an issue worth Rs 1,000 crore in 2015. Following this, few other banks too had green bond issuances. CLP India, was the first Indian company to tap this route. So far, Rs 7,200 crore has been raised via green bonds.
India has become the second-largest market globally for green bonds with $10.3 billion worth of transactions in the first half of 2019, as issuers and investors continued to adopt policies and strategies linked to sustainable development goals, according to the Economic Survey 2019-20.
In order to scale up the 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.
Steps taken by the Government for Green Bonds:
Typically, one benefit of taking on debt security is the ability to take collateral. Yet, in India with insolvency taking an average of 4.3 years the debt instrument scheme did not have many interested buyers.
To solve this issue the government introduced The Insolvency and Bankruptcy Code, 2016 which sought to create a single law encompassing the entire process. In the case of a default, a company will have 180 days to wind up with the possibility of additional 90 days being tacked on by the bankruptcy adjudicator. The reduction of risk for foreign investors associated with the new Bankruptcy and Insolvency Code has had a positive impact on the green bond market.
Classification of Green Bonds:
Before the adoption of standards by national bodies, nongovernmental organizations authored guidelines for regulators and green bond issuers that have served as the baseline for the policies that have been adopted by individual nations.
The Green Bond Principal (GBP) issued by International Capital Markets Association(ICMA). These principles “are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond. The GBP have four central components:
- Use of Proceeds;
- Process for Project Evaluation and Selection;
- Management of Proceeds; and
SEBI and Green Bonds:
In 2016, SEBI proposed a new framework for the issuance and listing of green bonds. In April 2017, SEBI finalized its rules after receiving feedback from various ministries and departments. The SEBI regulations seek to provide a framework under which investors and issuers can work towards a goal of $2.5 trillion in green investment by 2030 in order to reach India’s climate goals. SEBI believes that the regulations will help broaden the investor base and therefore benefit issuers.
India on Green Bonds:
Most Indian Green Bonds receive certification under the Climate Bonds Standard.
Green Bonds are regulated under the same framework that governs the issuing and listing of other debt securities known as the (Issue and Listing of Debt Securities) Regulations, 2008 or ILDS regulations.
Most of the bonds have been issued in U.S. dollars, which reduces risk for foreign investors, and the average size of the bonds outpaces that of other domestic bonds. India currently ranks eighth in outstanding green bonds.
The proceeds from the issuance have to be earmarked for the development of projects mentioned above but SEBI has maintained power to include other types of projects at its discretion.
Difference for Corporates:
For designating an issue of a corporate bond as green bond, an issue apart from complying with the issue and listing of debt securities regulations, would have to disclose additional information in the offer document such as use of proceeds.
Benefits of Green Bonds:
- Back home, Issuing green bond enhances issuer’s image
- Higher demand for green bonds equates to lower borrowing costs. Lower borrowing costs means reduced expenditures, which are either passed down to the investor in the form of a dividend or used to lower the operating costs for exchange-traded funds (ETFs) or bonds.
About the Author – Aditya Pratap
Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at firstname.lastname@example.org.
This Article is made by Aditya Pratap in assistance with Aditi Dixit.
Cases argued by Aditya Pratap can be viewed here.
Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws and how they may affect a case.