Introduction
With the large investment requirements in infrastructure space, it is acknowledged extensively that current project financing sources may be insufficient for capacity enlargement.
Thus, the need of the hour is to introduce new ways of financing and innovative financial tools that can influence a wider investor base such as pension funds, sovereign wealth funds, insurance companies, etc. that can make investment in the area of infrastructure.
To achieve India’s global obligations: According to an estimate, to complete India’s Intended Nationally Determined Contribution (INDC) goals about 2.5 trillion US dollars (at 2014–15 prices) will be needed between the years 2015 and 2030.
In this context, the INDC document makes a mention of the initiation of Tax Free Infrastructure Bonds of 794 million US dollars in order to fund renewable energy projects during the year 2015–16.
To achieve India’s renewable energy objectives: India has adopted an aggressive target of building 175 GW of renewable energy capacity by 2022 and, for this, a massive estimated funding of 200 billion US dollars is required
Thus, the financing requirements of renewable energy space need new methods to be discovered which could provide not only the desired financing, but may also help in lowering the price of the capital. Green bonds as a part of corporate bonds space may be one of the answers to this dilema.
What Are the Advantages of Introducing Green Bonds?
Positive Public Relations: Green bonds can go a long way in strengthening an issuer’s reputation, as this is an efficient method for an issuer to show its green credentials. It exhibits the issuers’ obligation for the development and sustainability of the environment. Further, this may also lead to some positive publicity for the issuer.
Diversification of Investor: There are specific global pools of capital, which are allocated for investment in Green Ventures. This source of capital puts an emphasis mainly on aspects associated to environmental, social and governance (ESG) of the projects in which they desire to make investment.
Thus, green bonds give an issuer access to such investors which they otherwise may not be in a position to tap with a regular bond.
Potential for Pricing Advantage: The green bond issuance have the ability to attract broader investor base and this in turn may help the issuers in the form of better pricing of their bonds with regards to a regular bond. Further, with growing focus of the global investor community for green investments, it is believed that new set of investors will make an entry into this space resulting in reduced cost of funding for green projects.
Global Experience: Issuance of green bonds began in 2007 and in the initial years, green bonds were a niche product, pioneered by a few development banks. The duration between 2007 and 2012 was characterised by the issuance of green bonds by the multilateral organisations namely the European Investment Bank and the World Bank, and governments etc.
The size of green bond market has nearly tripled between the years 2013 and 2014, with approximately 37 billion US dollars issued in 2014.
In India, the green bond market is still in the budding stage. Till now, only four entities, i.e., Yes Bank, CLP India, IDBI Bank and Exim Bank of India have issued green bonds in the country.
On the one hand, Yes Bank and CLP India have issued bonds worth 1315 and 600 crore rupees, respectively, while Exim Bank of India raised 500 million US dollars in March 2015 to supply fund to eligible green projects in countries which also include Bangladesh and Sri Lanka.
For designating the status of the bonds as Green, the investment of such money must be done in renewable and sustainable energy, clean transportation, climate change adaptation and so on.