Unquestionably, environmental conservation has evolved into a global development strategy and a shared concept among all nations. The environment serves as the foundation and guarantee for human life, survival, and sustainable expansion. The modern human race is seeking to transition into the postindustrial era and equilibrium with the environment at a later stage of development. All countries must carry out their individual roles and obligations in environmental governance in order to obtain reciprocal benefits, sustainable global development, and to create a home on earth for peaceful coexistence of people and the environment.
We have a duty to preserve the environment and improve it for coming generations because the entire human race has contributed to disrupting nature from its normal activities. Although our contributions to the growth environment may be fair, there is still room for improvement in order to better the globe for coming generations.
Indian government has taken its first step towards improving the existing climate change by issuing its maiden Sovereign Green Bonds recently. The government sold securities worth 80 billion rupees ($1 billion), including 40 billion rupees in 10-year and 5-year notes, according to a statement from the Reserve Bank of India. The 10-year bond was priced at a coupon of 7.29%, which is six basis points less than similarly rated national debt of a similar term. This is in comparison to a Bloomberg survey estimate of 7.31%.
Since that Prime Minister Narendra Modi wants to completely eliminate greenhouse gas emissions by the year 2070, investors are interested in funding India's environmental projects, as evidenced by the yield difference between these bonds and alternative investments. In preparing for another year of record debt sales to stimulate economic development, the government may benefit from lower borrowing costs.
Many of us might not be exposed to the idea of Green Bonds and confused why it makes a lots noise lately.
What are Green Bonds?
"Green bonds" are fixed-income financial products, just as regular bonds. Only projects that will positively influence the environment, such as those involving renewable energy, clean transportation, water management, etc. will receive funding from investors for green bonds. There is a crucial difference between green bonds and traditional bonds. It promotes sustainability and seeks to achieve a range of objectives like reducing pollution, increasing energy efficiency, and slowing down global warming.
History of Green bonds
The European Investment Bank first issued green bonds in 2007, which is approximately 15 years ago. The World Bank then started issuing green bonds in 2008 to support its financing initiatives for projects related to climate change1.The significance of green bonds became increasingly apparent with the introduction and growth of ESG (Environment, Social, and Governance) and Sustainability Framework in investing reporting framework.
As a result, the International Capital Market Association developed the Green Bonds Principles2 (GBP), which place an emphasis on transparency, disclosure, and integrity in the growth of the green bond market.
For India, in 2015, YES BANK, India's fourth-largest private sector bank, successfully sold the nation's first green infrastructure bonds, generating INR 1,000 crores in proceeds. YES BANK is using the funds to finance renewable energy infrastructure projects, including small-scale hydropower, solar, wind, and biomass projects.
Global Green Bond Market size
According to The Brainy Insights market research, the Global Green Bonds market was estimated to be USD 435 billion and would increase to USD 914 billion by 2030. People's attitudes towards investing have altered in just eight years as a result of increased awareness of the risks and challenges offered by climate change.
Green Bonds Market in India
India is one of the Asian nations with the fastest-growing green bond markets, according to the Economic Survey 2019–20, with transactions totaling $10.3 billion in the first half of 2019. India issued $6.11 billion in green bonds in the first 11 months of 2021, according to the UK-based green bond tracking organisation Climate Bonds Initiative. As was already noted, green bonds are comparable to ordinary bonds, with the exception that the revenues are allocated to specific "green," or climate-friendly, initiatives or assets.
In order to shift to a low-carbon economy, India would reportedly issue sovereign green bonds worth at least 240 billion rupees ($3.3 billion).
The CEEW-CEF estimates that by 2070, India will need to invest $10.1 trillion to become carbon neutral. The think tank estimates that creating green hydrogen and carbon capture and storage technologies will cost an additional $1.4 trillion and $8.4 trillion, respectively, to replace India's coal-dependent power sector with renewable energy sources.
India's Intended Nationally Determined Contribution (INDC) for the period of 2021 to 2030 calls for a 33% to 35% reduction in GDP emissions from 2005 levels, a 40% increase in installed capacity for non-fossil fuel-based energy sources, and the establishment of 2.5 to 3 billion tonnes of carbon dioxide equivalent in forest cover. These goals are in accordance with the Paris Agreement.
Type of Green Bonds
An organization-guaranteed bond, or general obligation bond, relies its creditworthiness on the issuing company rather than just the financed asset, in this case the solar farm. The farm is listed on the issuer's records, and all of the cash flow generated by the issuer—not only that from the farm—is used to pay back the loans. These bonds may be issued by public institutions, corporate companies, or the government. Some of these bonds also have the possibility of becoming convertible, giving the lenders the chance to turn them into equity in the future.
Asset-backed bonds' Creditworthiness is only based on the anticipated solar farm revenues; other cash flows of the issuer are not taken into consideration. The asset for the solar farm is transferred to another company, often known as a special purpose entity (SPE) or special purpose vehicle (SPV). Everything that this entity owns is this asset. The loans will only be repaid with proceeds from the sale of this farm.
A hybrid bond, also known as a covered bond, is a dual-recourse bond that can be set up in one of two ways. In the first strategy, the farm is listed on the issuer's books, and in the event of a payment default, the lender will take control of the farm. The lender will also be allowed to seize other issuer assets if the farm's value is insufficient to pay off the debt. In a second strategy, the farm is a SPE, and in the event of failure, the lender is given ownership of the SPE's assets. Similar to the first strategy, if the assets' value is insufficient, the lender may also bring a claim against the issuer's other assets.
The rules for issuing green bonds in India.
According to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, a "green debt security" is one that complies with these rules.
Green debt securities are any debt securities issued to raise funds for initiatives or items that fall under one of the following categories.
• Renewable and sustainable energy sources, including bioenergy, the sun, wind, and other nonpolluting energy sources.
• Transportation that is clean, such mass transit and public transportation.
• Sustainable water management techniques, such as supplying clean water for drinking or recycling used water.
• Climate change adaptation.
• Energy efficacy, such as environmentally friendly and energy-efficient building techniques.
• Efficient garbage disposal techniques, such as recycling and waste-to-energy schemes.
• Biodiversity protection, as well as any additional category that SEBI may declare; sustainable land use, such as reforestation, sustainable agriculture and forestry, etc.
Advantages of Investing Green Bonds
· Green bonds provide a way for investors to support environmental causes.
· Buying a green bond may be out of reach for small-scale investors. Green bonds that make it easy to invest in green bond baskets are still available.
· Those who are more environmentally conscientious and driven to take action to stop climate change are drawn to it.
· A higher demand for green bonds results in a possibilities to decrease in interest rates, which reduces company spending. These savings are either distributed as a dividend to investors or utilised to reduce the cost of borrowing, which boosts profitability.
· A few issuers also use the proceeds to restore water ecosystems and biomes and reduce carbon emissions.
Why are these bonds too significant for climate change?
Green Bonds have become a crucial financial tool to address the concerns of climate change and associated difficulties during the past few years. According to the International Financial Corporation (IFC), a part of the World Bank Group, climate change creates concerns for agricultural, food, and water resources as well as communities and economies. To overcome these issues, substantial funding is required.
In order to direct funds towards sustainable development, it is essential to link environmental projects with capital markets and investors. Green Bonds are one way to do this.
It is now essential for each of us to assume responsibility for the future development and protection of the environment, and the green bond may present a substantial opportunity to join global communities dedicated to preserving the environment and extending life on Earth.
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