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Sun shines on green bond market with India, China making debut

According to reports, at a time when climate change issues are pushing investors towards clean projects, green bond volumes this year are expected to more than double globally from last year’s $37 billion. This year, China and India, also made a debut in this niche fund raising segment.

India’s Yes Bank and Export-Import Bank successfully issued green bonds, while China’s debut green bond issuance came from Xinjiang Goldwind Science & Technology Co Ltd, a Chinese energy solutions provider, early August.

According to Henry Shilling, senior vice president, Environment Social & Governance, Moody’s Investors Service, the vast majority of green bonds so far have been sold by issuers in Europe and the US, where government environmental policies and the associated need to finance projects supporting greenhouse gas emissions (GHG) reduction targets are more advanced than in developing countries.

“However, some of these countries are starting to make the transition towards more environmentally sustainable economies, which could offer good opportunities for future green bond growth. We expect to see an increasing range of issuer credit profiles, maturities, currencies and bond features as the market grows,” Shilling added.

Shilling points out to a Chinese central bank report released in April that estimates the “green sectors” in that country will invest an equivalent of 3% of GDP (RMB2 trillion or $323 billion) annually in the next five years.

Green bonds were pioneered by the European Investment Bank (EIB) in 2007 with the issuance of a five year ‘€600 million ‘Aaa’ rated offering. The World Bank (International Bank for Reconstruction and Development, IBRD) followed in 2008 as part of its “Strategic Framework for Development and Climate Change.” The product was designed in partnership with Skandinaviska Enskilda Banken (SEB).

In India, Yes Bank successfully issued first ever Green Infrastructure Bonds raising Rs 1,000 crore. The issue launched on February 16, 2015 for Rs 500 crore plus green shoe option witnessed strong demand from leading investors including insurance companies, pension and provident funds, foreign portfolio investors, new pension schemes and mutual funds, says a Yes Bank spokesperson.

After its success, on August 5, 2015, Yes Bank again raised Rs 315 crore through the issue of green infrastructure bonds to International Finance Corporation on a private placement basis. The 10-year tenor bond is the first investment by IFC in an emerging market green bond issue.

The spokesperson said while globally there are many ‘Green’ focused funds and multilateral financing entities with specific mandates of investing in Green bonds/lending to green projects, the market for Green Bonds is quite nascent in India.

“But given the government’s focus on renewable energy and 175 GW of additional solar capacity installation by 2022, and the challenges around conventional lending, there is a need for innovative financing structures which could impart flexibility on tenors, lower the cost of funding etc,” he said.

The green bond was one such specialised avenue to provide for such financing but there are no incentives associated with these issuances for either the issuers or the investors, apart from the fact that they come under the infra-bonds category of the RBI, and therefore do not attract statutory requirements such as CRR and SLR.

Yes Bank plans to use the proceeds towards funding of infrastructure projects, in whole or in part, in the fields of renewable and clean energy projects including generation (including greenfield) from sources such as wind, solar, biomass, hydropower and other such projects. It has roped in KPMG to provide the assurance services annually, on the use of proceeds in accordance with the green bond principles.

Shilling says from a legal perspective, there is, at this time, no apparent enforcement mechanism, such as a step- up in interest rates, repayment acceleration, or the equivalent of a default, in the event that the proceeds are not invested as promised, or in the event that the expected environmental benefits do not materialise. This, however, could change in the future.

“The adoption of a voluntary set of best practice process guidelines in the form of Green Bond Principles (BGP) has helped to safeguard the integrity of the green bond market by standardising the definition of a green bond and emphasising the principles of disclosure as well as transparency. The guidelines, which were updated at the end of March 2015, consist of four components: use of proceeds, process for project evaluation and selection, management of proceeds, and reporting.”

Besides, in much the same way as risk disclosures and transparency initiatives worldwide serve to enhance investor/creditor ability to assess credit worthiness, robust disclosure and transparency practices around individual transactions that also facilitate consistency and improved comparability across borders and industries are considerations that are likely to advance the growth and development of green bonds in India and elsewhere.

The maturing of market would also require increase in both supply and demand for green bonds. “While, so far, green bonds in India have only been issued by lenders, we expect that as the market matures, we will see corporate green bonds, as well as project green bonds. New structures, products for credit enhancements would play a key role in development of corporate and project green bonds,” says the Yes Bank spokesperson.


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