PROJECT REPORT

ON
GREEN BONDS

Submitted To - Prof. Prapti Paul Submitted By- Mehak

Gupta (21BSP0899)

TABLE OF CONTENT
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S NO CONTENT PAGE NO.
1 Green bonds – introduction 3
2 Review of news articles 4 – 10
 Green bonds are growing in all regions
 Paying a “greenium” and other
concerns with green bonds
 India’s Stance on Green Policies
 Some barriers impeding the growth in
India
 Green bonds & coronavirus
3 Conclusion 11
4 Bibliography & news articles 12

What Is a Green Bond?

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A green bond is a type of fixed-income instrument that is specifically earmarked to
raise money for climate and environmental projects. These bonds are typically asset-
linked and backed by the issuing entity's balance sheet, so they usually carry the
same credit rating as their issuers’ other debt obligations.

Dating back to the first decade of the 21st century, green bonds are also referred
to as climate bonds.

In 2008, the World Bank issued the first labeled “green bond”. Before that, in
2007, the European Investment Bank (EIB) issued a bond targeting climate change
initiatives. This frontrunner to the “green bond” was labeled “climate awareness
bond”. Since then, the climate-aligned bond market – which includes not only
instruments labeled as green bonds but also bonds from issuers that derive the bulk
of their revenues from green business lines – has grown substantially.

Prominent innovation 
One of the most prominent financial innovations in the area of sustainable finance
over the past ten years has arguably been the development of green bonds. And the
growth of the green bond and other ‘labelled bonds’ markets (e.g. sustainability and
social bonds). Green bonds and climate bonds have received increasing attention
over the past few years as key instruments to finance the transition towards a low-
carbon economy. From being a niche at its creation in 2007, the market has grown
significantly, with new types of investors and issuers participating in its expansion.
The green bond market is attracting new issuers and a more diversified base of
investors.

However, the size of the green bond market remains small compared to the
challenges it is meant to address and to the overall traditional bond market.

So what are the benefits of green bonds?

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  First, let’s be clear: Green bonds do offer benefits, and despite a tough time
during COVID-19, the green bond market is likely to continue to grow over the
next decade.
 That’s good, because despite their shortcomings green bonds still promise to
be an important source of capital for much-needed climate initiatives, and a
source of investment opportunities for ESG investors and funds.
 Green Bonds enhances issuer's reputation and showcases its commitment to
sustainable development.
 They typically have a lower interest rate than the loans offered by the
commercial banks.
 Foreign investors are focusing more on green investments which in turn may
help in reducing the cost of raising capital.
 They have been crucial in increasing financing to sunrise sectors such as
renewable energy, thereby contributing to sustainable growth.

Green bonds are growing in all regions

While issuance has grown across every region, Europe was the main driver behind
the substantial increase in 2019 volumes of green bonds.

European issuance reached USD 116.7bn, up 74% from 2018. Asia-Pacific, which
saw nearly a third (29%) of year-on-year growth, remained the second largest
region, although North America’s 46% growth began to close the gap between the
two

Growth of green bonds by region, 2015-2019.

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The top issuers are Chinese financial institutions ICBC and Industrial Bank. French
banks Crédit Agricole and BNP Paribas rank third and fourth, with a combined total
of USD 4.5bn. In 2019, Saudi Arabia debuted and certified a climate bond coming
from the Islamic Development Bank. This deal allocated USD 1.1bn to renewable
energy and energy efficiency for buildings.

India has the second largest emerging green bond market after China.

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.

Green bonds are debt securities issued by financial, non-financial or public entities
where the proceeds are used to finance 100 per cent green projects and assets.
India now has the second-largest emerging green bond market after China.

A number of government agencies have contributed to this issuance including Indian

Renewable Energy Development Agency (IREDA) and Indian Railway Finance
Corporation (IRFC). In 2018, State Bank of India entered the green market with a
$650 million certified climate bonds.

Despite the innovations in the field since 2015 (see Figure 1), the Indian green bond
market hasn’t been able to diversify itself much in terms of assets, which remain
focused on renewable energy projects.

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Paying a “greenium” and other concerns with green bonds
Rapid growth of green bonds has come with rising risks. Increasingly, some large
investors are warning about potential dangers in the green bond market. In
particular, they have raised concerns about the so-called “greenium” – a premium
that buyers or issuers may pay for costlier green bonds – and the relative
shallowness of the green bond market.

As issuance has risen, green bond issuers have become more diverse. Today, a
growing proportion of green bonds are issued by individual cities, national
governments, and corporations. The explosive growth in green bonds has been
driven, in large part, by the growth of ESG investing. However, some investors have
raised questions about its long-term sustainability.

The chief investment officer of Japan’s Government Pension Investment Fund

(GPIF) – the world’s largest pension fund – has described green bonds as a “passing
fad.” According to the GPIF’s Hiro Mizuno, green bonds are unlikely to become
mainstream investment products because of the costly and complex issuance
process involved.

Conceptually, green bonds should have the same credit rating and coupons as their
issuer’s other fixed income instruments, as they are backed by the same balance
sheet. However, their issuance requires a significant amount of additional disclosure
compared to traditional bonds. This is because green bonds must demonstrate their
“green” credentials – particularly if they want to be certified as “green bonds” under
various protocols, such as the International Capital Market Association’s (IMCA)
widely referenced Green Bond Principles.

The process of demonstrating their environmental impact, which may involve

periodic audits of their activities, imposes an additional cost on green bonds. Green
bonds are therefore more expensive to issue than traditional bonds. Fact that
green bond issues are typically heavily oversubscribed by investors searching for
sustainable investment options, has led some to anticipate the existence of a
“greenium”, i.e. – as mentioned earlier – a premium on an issuer’s green bonds
compared to their traditional ones.

There is little evidence of a consistent “greenium” in bond markets. Instead, green

bonds typically trade on the same terms as an issuer’s traditional bonds. That’s why
Mizuno questions the sustainability of green bonds, which cost more to issue but
neither attract nor offer a premium.

A second concern, and one raised by several large institutional investors, is that
there are relatively few green bonds issued each year. While issuance has grown
rapidly, it still accounts for less than 1% of total global bond issuance. This means
that the pool of green bonds is shallow, which has potentially negative
implications for liquidity.

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Low performance and not enough focus on green projects
Performance is of course another important aspect of green bonds. A recent study of
green bonds issued between 2013 and 2017 found that the yields of green bonds
are on average two basis points lower than those of comparable conventional bonds.
And a 2020 study clearly indicates that things in this field are not as they appear.

Green bonds are designed to be a familiar and low risk financial instrument that
allows both investors and issuers to contribute to sustainability mandates at relatively
low cost. Yet in the latest study the authors wrote: “Our respondents do not judge
green bonds to play a large role in shifting capital from unsustainable to sustainable
investments”.

Nevertheless, green bonds are perceived to provide incentives to issuers to raise the
“green ambitions” of specific projects and their organizations.

Overall, when market actors reflect on the impact of green bonds in practice, they
tend not to highlight the actualization of green projects. Instead, they emphasize the
mainstreaming of sustainability consideration into the ways investors and issuers
interact with each other and internally within their organizations.

However, because green bonds are marketed in terms of metrics such as renewable
energy generated, emissions avoided, or waste managed, green bonds risk giving
market outsiders the impression that they are more impactful that they actually are in
terms of shifting capital.

Not that innovative, and not really reducing emissions

The reality is that as a financial tool green bonds are a quite conservative innovation.

They do not appear to be unlocking new sources of capital for green investment or
making green investments financially viable when they otherwise would not be.

But are green bonds at least decreasing CO2 emissions?

Well, current labels for green bonds do not necessarily signal that issuers have a
lower or decreasing carbon intensity, measured as emissions relative to revenue, at
least, not directly, according to this study.

Since 2018, Green bonds have constituted only 0.7 per cent of all the bonds issued
in India.

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Some barriers impeding the growth in India-
1. Lack of Measures Supporting this Novel Instrument:

The newness of this instrument causes the average investor to be wary, especially if
the bond is not issued by one of the more recognized green sectors like renewable
energy.

2. Lack of Sector Diversification in Green Bond Issuances:

This is especially true for unconventional investment sectors like forestry and marine
conservation, innovative transport, and new business models. With the limits of
traditional bond issuances, it is difficult to finance such climate projects.

3. Lack of Standardized Frameworks for Evaluating Diverse Projects in the

Indian Context:

This includes a lack of accepted taxonomies, defining ‘what is green’ across different
asset classes and industries, which encourages issuers and bankers to be cautious
about financing new asset classes in the green bond market.

India’s Stance on Green Policies

 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.
The main objectives of this platform are exchange and dissemination of
information to promote best practices in environmentally sustainable finance,
comparing different initiatives and identify barriers and opportunities to help scale
up environmentally sustainable finance.

 Macro-Prudential Policies and Concessional Lending

Macro prudential policies play an important role in our financial system by mitigating
systemic risks. One such set of risks are tied to adverse climatic events, but along
with that, the move to a low-carbon economy, with ambitious emission targets and
regulations, can lead to the re-pricing of carbon-intensive assets. This can potentially
burst the asset-price carbon bubble, and generate systemic risks. To deal with these,

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and the redirection of credit from carbon-intensive sectors to green investments,
Central Banks can step in with Green Macro-Prudential Policies. On the other hand,
concessional lending practices include loans that are given at low interest rates and
are meant to encourage the growth of certain low-performing or emerging sectors.

 The RBI’s primary mandate is price stability and economic growth.

In terms of green finance, no green macro prudential policies have been

implemented yet. However, it is considering including environmental risks in the
assessment of agricultural price developments. RBI’s concessional lending scheme
(PSL), ensures that 40 per cent of commercial loans are extended to the priority
sector. After the amendments made in 2012 and 2015, housing and social
infrastructure and renewable energy have been included in PSL in an effort to
address sustainable development.

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Green bonds suffer setback due to coronavirus pandemic but long-
term demand to stay strong
Green bonds have suffered a setback as investors shunned debt markets amid the
coronavirus pandemic, but experts say the sustainable debt instrument is showing
signs of bouncing back, with recent issues heavily oversubscribed as issuers return
to market.

Demand over the long term will resume its upward trend as investors tap the bonds
for their preferential pricing, issuers maintain their climate change projects and
governments use the instrument to jump start economies, experts say.

Although a tiny fraction of the overall debt market, green bonds — debt that finances
environmentally friendly projects such as wind farms or solar power — have grown
rapidly over the last eight years, from virtually nothing in 2012 to $254.9 billion in
2019, based on figures from the nonprofit Climate Bonds Initiative, which promotes
green investment.

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 CONCLUSION
Green bonds are designated bonds intended to encourage sustainability and to
support climate-related or other types of special environmental projects. More
specifically, green bonds finance 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. They also finance the cultivation of environmentally friendly
technologies and the mitigation of climate change.

Green bonds come with tax incentives such as tax exemption and tax credits,
making them a more attractive investment compared to a comparable taxable bond.
These tax advantages provide a monetary incentive to tackle prominent social issues
such as climate change and a movement to renewable sources of energy. To qualify
for green bond status, they are often verified by a third party such as the Climate
Bond Standard Board, which certifies that the bond will fund projects that include
benefits to the environment.

The World Bank is a major issuer of green bonds. While it finances projects around
the world, the institution has been very active especially in the United States, where
its issuances have totaled U.S. $5.3 billion between FY 2014 and FY 2018,4 and in
India, where its issuances total over 2.7 billion rupees.

In the latter country, one of the bank's oldest ventures has been the Rampur
Hydropower Project, which aims to provide low-carbon hydroelectric power to
northern India's electricity grid. It produces 1,957,000 megawatts annually, saving
1,407,700 tons of carbon dioxide emissions a year.

As you’ve seen, green market`s growth creates potential challenges for both
investors and bond issuers. The good news is that the green bond market has grown
rapidly since the issuance of the first green bond in 2007, and demand for green
bonds is higher than supply. Most of these bonds focus on climate change.

The bad news is that green bonds still accounted for less than 0.2% of all bonds
issued last year, and only 3-5% of the proceeds of these green bonds can, in turn,
be traced to climate resilience (approx. USD 12 billion).

There is thus a vast opportunity to grow the resilience bond market which in my mind
is probably the area where they could make biggest and most real difference.
Monitoring the development and formalization of the green bond market will be a key
action item for any sustainable economist.

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 News articles and Bibliography

 https://energy.economictimes.indiatimes.com/news/renewable/india-becomes-
second-largest-market-for-green-bonds-with-10-3-billion-transactions/73898149
 https://www.bis.org/publ/qtrpdf/r_qt2009c.pdf
 https://www.tandfonline.com/doi/full/10.1080/20430795.2020.1724864
 https://www.outlookindia.com/outlookmoney/opinions-and-blogs/sustainable-
finance-through-green-bonds-7221

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