Understanding green bonds and greener way of financing

As reports suggest, higher interest rates and unattractive terms under which debt is available in India raise the cost of renewable energy by 24-32 per cent compared to the U.S. and Europe.

  What are green bonds?

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.

A green bond is very similar. The only difference is that 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. There is no standard definition of green bonds as of now.

Indian firms like Indian Renewable Energy Development Agency Ltd and Greenko have in the past issued bonds that have been used for financing renewable energy, however, without the tag of green bonds.

Green bonds are issued by multilateral agencies such as the World Bank, corporations, government agencies and municipalities.  Institutional investors and pension funds also have appetite for such bonds. For instance, investment funds BlackRock and PIMCO have specific mandates from their investors to invest only in bonds which fund green projects. The issuer provides periodic reports about the project.


Why are they in the news?

In March, the Exim Bank of India issued a five-year $500 million green bond, which is India’s first dollar-denominated green bond. The issue was subscribed nearly 3.2 times. The bank has said it would use the net proceeds to fund eligible green projects in countries including Bangladesh and Sri Lanka. Earlier, in February, Yes Bank raised Rs 1,000 crore via a 10-year bond, which was oversubscribed twice.


Why are green bonds important for 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. This isn’t easy. As reports suggest, higher interest rates and unattractive terms under which debt is available in India raise the cost of renewable energy by 24-32 per cent compared to the U.S. and Europe. “India has big goals in terms of renewable energy installations, but a big hurdle has been financing and the cost of financing,” says Raj Prabhu, CEO and Co-founder of Mercom Capital Group, a global clean energy research and communications firm.

“Budget allocations have been insufficient. 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. Currently, options for raising funds and investing in the “renewable energy story” in the public markets in India is very limited,” he says. That’s why green bonds seem like a good option.


Still, why are green bonds an attractive option?

Shantanu Jaiswal, analyst at Bloomberg New Energy Finance, says, “Green bonds typically carry a lower interest rate than the loans offered by the commercial banks. Hence, when compared to other forms of debt, green bonds offer better returns for an independent power producers,” Samuel Joseph, Chief General Manager, Treasury and Accounts Group, Exim Bank of India, says as these bonds are meant for specific investors looking to invest in renewable energy projects, pricing could be attractive.

The bank’s green bond was priced at 147.50 basis points over US Treasuries (whereas, usually, bonds are priced at treasuries plus 150 basis points) at a fixed coupon of 2.75 per cent per annum.


Why should an investor get excited with lower interest?

Because, it inherently carries lower risk than other bonds. According to a KPMG report, in case of a green bond, “proceeds are raised for specific green projects, but repayment is tied to the issuer, not the success of the projects.” This means the risk of the project not performing stays with the issuer rather than investor.


How well have green bonds performed globally?

According to Bloomberg New Energy Finance, a record $38.8 billion in green bonds were issued in 2014, 2.6 times the $15 billion issued in 2013. “Most issuances of international green bonds have been oversubscribed suggesting a strong appetite for them especially when done by a strong issuer like a large corporate or a government agency,” the report says.


Who have been the issuers of these bonds?

In the period between 2007 and 2012, supranational organisations such as the European Investment Bank and the World Bank, as also governments, accounted for most of the green bond issue. Since then, corporate interest has risen sharply. In 2014, bonds issued by corporations in the energy and utilities, consumer goods, and real estate sectors accounted for a third of the market, according to KPMG.


What are the risks and challenges?

Globally, there have been serious debates about whether the projects targeted by green bond issuers are green enough. There have been controversies too. Reuters a few months back reported how activists were claiming that the proceeds of the French utility GDF Suez’s $3.4 billion green bond issue were being used to fund a dam project that hurts the Amazon rainforest in Brazil.


There could also be a currency risk.

From an Indian perspective, a challenge of making investors subscribe could be the tenor and rating of green bonds, reckons Bloomberg’s Jaiswal. “The downside is that green bonds in India have a shorter tenor period of about 10 years in India whereas a typical loan would be for minimum 13 years. This is less when compared to many international issuances.” Also, he says, “Many target buyers of Indian green bonds may not invest in any bonds that are rated lower than the AAA-.”

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Printable version | Sep 23, 2021 12:19:18 PM |

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