Sustainable Investment and

Finance
Unit-3 Financing Sustainability
Investing in long-term value creation, different ways of raising capital for
sustainability – national level (carbon tax) and company level – carbon credit,
crowd funding, equity instruments – impact funds; bond instruments – social
investment bonds, green bonds, impact bonds, blue bonds; alternative
financial instruments – VC with an impact, banking – new forms of lending,
insurance – to manage long-term risk.   
 Green Finance
Green finance” Financial instruments whose proceeds are used
for environmentally sustainable projects and initiatives,
environmental products and policies under the single goal of
promoting a green economic transformation toward low-
carbon, sustainable and inclusive pathways.

Green finance includes those Financial arrangements that are

specific to the use for projects that are environmentally
sustainable or projects that adopt the aspects of climate
change.
 Green Finance
In 2015, India entered the green bond market with the first
green bond issued by YES Bank to fund renewable and clean
energy projects, especially in the wind and solar sectors. The
green bond market has increasingly grown to include many
businesses in the public service, state-owned commercial banks,
state-owned financial institutions, corporations and the banking
sector.
 Projects that fall under the Green
Finance
● Renewable energy Umbrella 
and energy efficiency
● Pollution prevention and control
● Biodiversity conservation
● Circular economy initiatives
● Sustainable use of natural resources and land
● Clean transportation Projects
● Waste water and water management projects
● Green Building Projects
 Benefits of Green Finance 
Encouraging green financing on a massive scale implies that
green or environmental initiatives get priority over usual
business investments that may or may not be sustainable.

Focusing on green finance leads to transparency and a regular

flow of investments into environmental objectives.

Growth of green financing helps in creation of more jobs and

business opportunities.

Development of green finance leads to better human life and

facilities as well as sustainable developments without spoiling
or destroying nature.
 Green Finance
India is a developing country and continues to explore and
practise its role in every aspect of becoming a developed
nation. It needs guidance and a proper strategy to operate in
the area of green finance, Policies and Regulations towards
Raising Green Bond Market.

In order to bring India’s green bond market to scale,

government support in the form of policy and regulatory
support. Over the years, the Government of India has given
greater policy clarity and regulatory stability in line with the
agreements set out in the Paris Agreement, which encompasses
a reasonable policy approach towards the green market.
 Securities and Exchange Board of
India:
According Released
to the guidelines,the domestic
debt protection shall begreen
known as
‘Green’ or ‘Green Debt Securities’ if the raised funds are to be
bond
used for properties fallingguidelines:
under any of the accompanying
general classifications:

● Renewable and sustainable power source, wind, solar

energy, bio-energy, eco-friendly innovation & technology.
● Green transportation, particularly public transport etc.
● Adaptation to global warming.
● Reasonable waste administration including reusing, squander
to-vitality, productive removal of wastage
 Securities and Exchange Board of
India:
According Released
to the guidelines,the domestic
debt protection shall begreen
known as
‘Green’ or ‘Green Debt Securities’ if the raised funds are to be
bond
used for properties fallingguidelines:
under any of the accompanying
general classifications:

● Energy conservation including effective green structure, like

green buildings.
● Green infrastructure utilization, like sustainable agriculture &
forestry, forest management.
● The preservation of ecosystem
 Sustainable Investment and
Finance
Green Bonds: Green bonds are a type of debt issued by public or
private institutions to finance themselves and, unlike other
credit instruments, they commit the use of the funds obtained
to an environmental project or one related to climate change.

Green bonds are specifically destined for the funding or

refunding of green projects, i.e. projects that are sustainable
and socially responsible in areas as diverse as renewable energy,
energy efficiency, clean transportation or responsible waste
management.

On 5 July 2007, the European Investment Bank (EIB) launched a

very special issue for the first time: green bonds.
 Sustainable Investment and
Green Bond Finance
Green bonds can be issued by private or public issuers to fund
investments that deliver environmental benefits. Like regular
bonds, green bonds are fixed income instruments that
represent a loan made by an investor to a borrower.

Issuers repay the capital (principle) and accrued interest

(coupon) to the investors over an agreed period. Unlike regular
bonds, however, most green bonds do not finance the general
working capital of the issuer. Instead, issuers of green bonds
commit to using the proceeds of the green bond to exclusively
finance or re-finance, in part or in full, green projects, assets, or
other business activities.
 Sustainable Investment and
Finance
● IBERDROLA, THE LARGEST GREEN BONDS ISSUING GROUP
IN THE WORLD.

Issuer of Green Bonds

Corporations
Government
Multilateral Organisation
Banks and Financial Institutions
 Sustainable Investment and
Finance
Biggest Buyers of Green Bonds

Institutional investors
Investment mangers
Government

Largest Issuers of green bonds in the Unites States in 2021

Fannie Mae- 13801 Million US $
Wells Fargo-2,880 Million US $
Ford-2,500 Million US $
 Green Bond
Principles of Green Bond

The funds will be used for green projects that will have a

beneficial effect on the environment.

The issuer of a green bond must transparently notify the

investors of the environmental sustainability goals, allowing for
them to be assessed and externally reviewed.

The funds management will be appropriately and transparently

controlled by the issuer, which will allow an auditor to perform
a complementary review.
 Green Bond
Principles of Green Bond

The issuer of this type of bonds will periodically update

the information about how the funds are used and the
environmental benefits obtained.
 Need of Green Bonds
Climate change has emerged as a major concern for
policymakers.
The relation between climate change and financial markets runs
in both directions asymmetrically.
Climate change impacts financial markets unfavourably as
climate shocks could lead to losses on banks and financial
institutions.
Financial markets can address climate change favourably by
designing financial products to lower the risks.
 Features of Green Bond
● This bond is similar to a regular bond used to raise money for
the specific purpose of funding green projects like renewable
energy, fishery and forestry, clean environment, etc. 
● The issuer uses the proceeds from green bonds fund green
projects and not other purposes. 
● The bondholders receive fixed coupon payments until
maturity.
● The tenure of green bonds issued by Indian corporates is
wide—2 to 20 years. 
● Upon maturity, the issuer repays the principal amount to the
investor.
● These bonds offer special tax incentives like tax credits or tax
exemption to attract investors. 
 Features of Green Bond
● A retail investor can buy these through a broker.
● Indian corporates also issue green bonds in dollars and these
are listed in foreign stock markets such as the New York
Stock Exchange and London Stock Exchange.
● The yield on these bonds is in the range of 6.5-10.5%.
 Facts of Green Bond
The World Bank issued its first green bond in 2008 .

In 2021, the United States was the largest green bond issuing
country, having issued bonds worth 83.6 billion U.S. dollars.

 A state sponsored company and the country's largest

mortgage bank, Fanny Mae issued green bonds worth 13.8
billion U.S. dollars in 2021

India's first green bond was issued by Yes Bank in 2015 to raise
INR 5 billion to enhance long-term resources for funding
infrastructure projects in renewable and clean energy.

JSW Hydro, Greenko, ReNew Power and Adani Green were key

 Facts of Green Bond
.
Green Bond purchasers are typically institutional investors.

In 2021, JP Morgan was the leading underwriter of green bonds

worldwide, with a value of approximately 26.5 billion U.S.
dollars.

Around 76% of the green bonds issued in India since 2015 have
been denominated in US dollar.

The green bond market annual issuance could exceed the $1

trillion mark by 2023.
 Regulatory authorities governing Green Bond

.
Securities Exchange Board of India
International Capital Markets Association
Issue of Green Bonds in India
 Issue of Green Bonds in India

Issuer Amount($ Coupon rate Tenor Month of

Million Issuance
Renew Energy 400 4.5% 5.25 January 2021
Global

SBI 650 November

2021

Adani Green 750 4.375% 3 September

Energy Limited 2021

Adani 300 10 July 2021

Electricity
Mumbai
Limited
 Types of green bonds in India
Green use
  of
Proceeds
Bond

.
Green Green use of
Securitiz Types Revenue
ed Bond Bond

Green
project
Bond
 Types of green bonds in India

1. Green use of proceeds bond- It is a standard recourse debt obligation

where the proceeds are transferred to the account for the use in the
project. If there are pending proceeds of the investor then the issuer
needs to inform the investor regarding the appropriate use of the
unused proceeds.

2. Green Use of Proceeds Revenue Bonds- It is a non-recourse debt

obligation bond where the proceeds can go to related or unrelated
Green project. Again the proceeds will be credited to the project
account. Also the issuer needs to inform regarding the use of the unused
proceeds of the allocated amount.
 Types of green bonds in India

3. Green Project Bond – Here the investor has a direct risk and
the proceeds will be used for one or multiple green projects
with or without recourse debt obligation.

4. Green Securitized Bond- Here the bond is collateralized by

one or more projects and the repayment is done through the
cash flows generated by the project itself.
 Green washing

Green washing or for that matter ESG washing is becoming as

much a concern today as global warming – domestically and
globally. 

The act or practice of making a product, policy, activity, etc.

appear to be more environmentally friendly or less
environmentally damaging than it really is.

The practice of green washing appears more common as firms

attempt to better position themselves in a global marketplace
growing more concerned with corporate sustainability.
 Advantages of Green Bond
Green bonds help to create goodwill for the issuer as well as for
those investing in them.

These bonds are suitable for investors particularly looking to

invest in environmental projects.

The interest of these bonds is lower than the loans offered by

commercial banks

Foreign investors are aiming for more green investments. As a

result, the cost of raising capital can be minimised.

Green bonds are helpful in the development of local financial

markets, even for non-environmental projects.
 Advantages of Green Bond
With the issue of Green bonds by Indian corporates there has
been a positive effect on account of Investor diversification,
increased capital flow from investors who would invest in green
ventures and access to finance at various stages of the project
life cycle.

.
 Disadvantages of Green Bond
There is a lack of credit rating and rating guidelines for these
bonds.

Issuers issue these bonds for a longer period say ten years
which may fail to offer liquidity to some investors. Also, green
projects require a more extended period to deliver returns.

Investors are reluctant to invest in these bonds because their 

credit rating  is below AAA or AA. 
Challenges of Green Bond in India
Low credit rating as BBB is a challenge to the growing Indian
market as an investor does not get attract.

Insufficient framework to evaluate the sustainable project at its

early stage itself a challenge in India which further channelize the
slow growth and less return due to which investors are related
less interested to invest.

Information asymmetry

Maturity mismatches between long-term green investment and

relatively short-term interests of investors.

Lack of Public Awareness

 Sustainable Investment and
Finance
Impact Bonds:

Impact bonds are emerging as an innovative and effective way

to foster relationships between public and private sectors and
encourage socially responsible investments (SRIs) and drive
progress on attaining Sustainable Development Goals (SDGs.)
 ..

..
 Sustainable Investment and
Types of Impact Bonds: Finance

● Social Impact bonds (SIBs)

● Development Impact bonds (DIBs)

As of 2021, 206 impact bonds have been contracted in 35

countries across six sectors. The majority of the deals are
contracted in just a few countries; those contracted in UK
(#69),US (#26) Netherlands (#15), Portugal (#13), and Australia
(#10) make up 69% of the total number of impact Bonds.

Emerging economies like India also ventured impact bonds

route to drive social outcomes in sectors like education and
health.
 Sustainable Investment and Finance

A social impact bond is a type of financial security that provides

capital to the public sector to fund projects that will create
better social outcomes and lead to savings. These bonds are a
new development in finance.

UK-based Social Finance Ltd introduced the first social impact

bond in 2010.
 Sustainable
Impact Bonds
Investment and
Impact
Country
Bonds Finance
Beneficiaries Key sectors

UK 69 65,271 Employment, Child and Family Welfare,

Homelessness

US 26 6,76,316 Criminal Justice, Homelessness, Child and Family

Welfare
Netherland 15 4,813 Employment, Health, Criminal Justice
s
Portugal 13 1,39,395 Education, Employment, Health Criminal Justice,
Child and Family Welfare

Australia 10 9,598 Child and Family Welfare, Criminal Justice,

Employment, Health, Homelessness

India 3 8,07,300 Education (#2 SIB), Health (#1 SIB)

 How Does a Social Impact Bond Work?

1. Identifying the problem and possible solutions

2. Raising funds for the project from private investors
3. Implementing the project
4. Assessing the project’s success and paying the project manager
and investors
 Advantages of Social Impact Bond

1. Improve effectiveness and efficiency of social programs

2. Strengthen relationship between public and private sectors
3. Fund politically unattractive initiatives
4. Enable service providers to scale-up.
 Sustainable Investment and
Blue Bonds Finance
Blue bonds are debt instruments which are issued by national
governments or development banks. The money raised from
these bonds is used to undertake activities which help to
preserve and enhance marine resources. The idea is to raise
funds which will exclusively be used for the betterment of
marine resources.
 Sustainable Investment and
Blue Bonds Finance
The World Bank defines blue bonds “as a debt instrument
issued by governments, development banks or others to raise
capital from impact investors to finance marine and ocean-
based projects that have positive environmental, economic and
climate benefits.
.
 Blue Bonds
World Bank is known to provide a free credit guarantee to the
buyers of the blue bond.
If the issuing party is unable to repay the funds that they have
borrowed, then the World Bank will repay the loan.
Since the World Bank is an institution with virtually unlimited
funding, this guarantee significantly reduces the risk of
investors.
As a result, even the meager return offered by blue bonds
seems significant.
Countries all over the world use credit guarantees and
concessional loans in order to increase the returns for their
investors.
 Sustainable Investment and
Finance
Blue Bonds and Developing Nations

Blue bonds are good for developing nations as well. This is

because Africa has the largest shoreline in the world. The
shoreline stretches for over 47000 kms. Occupations like
fisheries and aquaculture account for over $25 billion in GDP
every year. Also, close to 13 million people are employed. Blue
bonds are being used to ensure that the ocean and related
occupations remain sustainable. This will ensure that there is
adequate food in the African continent and also that the people
of Africa are gainfully employed.
 Projects funded by Blue Bonds
Ports and shipping
Fisheries
Aquaculture
Marine Renewable Energy
Coastal and Marine Tourism
Ecosystem Management and Restoration
Waste water and Sanitation
Solid waste Management and Circular Economy
Ocean-Draining River Rehabilitation
 Significance
India has tremendous scope for deployment of blue bonds in
various aspects of the blue economy.

India has a 7,500 kilometer-long coastline and 14,500 kilometers

of navigable inland waterways, and the development of the
blue economy can serve as a growth catalyst.
 How are the Proceeds of Blue Bonds Used

Since the oceans are not affected any single industry, it is

difficult to zero down on the source of pollution. This makes it
imperative to spend the proceeds of blue bonds on a wide
range of ecologically sensitive projects.

For instance, the port infrastructure around the world needs to

be modernized in an ocean-friendly manner. There is also a need
to manage better wastewater and solid waste which is often
dumped into the ocean. Pollution caused by fertilizers and
industrial chemicals also needs to be reduced drastically.
 Venture Capital as a Sustainable Finance

The Business and Sustainable Development Commission has

estimated there will be $12 trillion of market opportunities
involved to achieve the United Nations Sustainable
Development Goals in such areas as food and agriculture, cities,
energy and materials, and health and well-being.

This opens up enormous opportunities for venture capitalists to

invest in companies tackling climate change through clean and
innovate technologies aimed at meeting the SDGs. 
 Venture Capital as a Sustainable Finance

By investing in alignment with the SDGs, venture capitalists

have the ability not only to increase profitability but also to
contribute the planet’s sustainability, helping to end poverty,
protect our earth and generally improve lives. 
 Venture Capital as a Sustainable Finance

Venture capital is a form of financing offered to start-up

companies and small businesses by outside investors in return
for equity in the company and is usually provided at early and
seed round funding. Investors look for high-growth and
potentially risky opportunities which can result in above-
average returns. It does not always involve financial investment,
it can also include managerial and technical expertise.
 Venture Capital

Providing seed, start-up and first stage financing' and also

'funding the expansion of companies that have already
demonstrated their business potential but do not yet have
access to the public securities market or to credit oriented
institutional funding sources’.
 Characteristics

Long time Horizon

Lack of liquidity
High risk
Equity Participation
Participation in Management
Offered to commercialise ideas
 Examples of venture Capital Firms

1.Fresh Ventures
2.Time for the Planet
3.Full cycle
4.Atlas Capital
5.Eutopia
6.Kairos Aerospace
7.Oklo
8.The Craftory
 Venture Capital Firms that are into sustainable finance

Infuse Ventures
Nexus Venture Partners
SIDBI Venture Capital
Titan Capital
SucSEED Venture Partners
The Rise Fund
 Venture capital is suitable for sustainable investment

VC is uniquely compatible with the needs of sustainable

projects. VC funds typically have a long lock-in period, which
aligns well with the need of sustainable start-ups to secure
investment for an extended formation period.

VC funds are also able to value-add to sustainable start-ups by

providing technical knowledge, industry relationships or
management skills, therefore bringing additional benefits to the
monetary contribution.
 Venture capital is suitable for sustainable investment

It enables the portfolio company to commercialise cutting-edge

science to achieve the innovation needed for sustainable
development and accelerates the availability of sustainable
solutions, heralding various environmental and social benefits.

VC offers strong and unique investor protection mechanisms

that are urgently needed in the sustainable investment space
given its many uncertainties.

VC investment normally comes with strong continuous

monitoring and contractual mechanisms to guard against
uncertainty and information asymmetry.
 Venture capital is suitable for sustainable investment

The VC community also runs on an implicit reputation

mechanism, where alternative investors would find the project
unattractive if existing investors ceased to provide funding in
subsequent rounds.

VC funds also acquire more control in the portfolio companies

and their de facto influence over decision-making is often
disproportionately larger than the voting rights associated with
their equity holdings.

VC fund managers often become directly involved in the

corporate governance of portfolio companies and steer them
towards sustainability.
 Advantages of Venture capital

1.Helps to gain business expertise

2.Business owners do not have to repay
3.Helps in making valuable connections
4.Helps to raise additional capital
5.Aids in upgarding technology
 Sustainable Investment and Finance

Carbon Tax:

Climate change is a cause for global concern and could have

devastating effects on the planet if serious mitigation efforts
are not undertaken. Carbon taxes are one of the mechanisms
for achieving this target.

A carbon tax is a tax on carbon emission. The purpose of a

carbon tax is to reduce carbon emissions by sending a price
signal to emitters to incentivize them to eschew carbon-
intensive production and consumption. 
 Sustainable Investment and Finance

The revenue collected by governments as carbon tax can then

be used to further reduce emissions by channelizing such funds
to invest in green technology, renewable energy sources,
research on emission reduction, etc.
 Sustainable Investment and Finance

According to the United Nations, 23 of these countries have

implemented carbon taxes, primarily at the national level.

Countries began adopting carbon taxes in the early 1990s—

Finland introduced a carbon tax in 1990, Norway and Sweden in

1991; and Denmark in 1992.

Over the decades, carbon taxes were introduced not just in

developed economies, but also in emerging economies .
 Sustainable Investment and Finance

According to the Global Climate Risk Index 2021 India is among

the 10 countries most affected by extreme weather caused by
climate change. As a developing country, it is of paramount
importance that carbon emissions are brought to the lowest
level possible. While India is one of the few countries on track to
achieve its targets for emission reduction under the Paris
Agreement, it is essential that further efforts are taken to
bolster it against climate change.
 Sustainable Investment and
Finance
Carbon Tax

Emissions of carbon dioxide and other greenhouse gases are

changing the climate. A carbon tax puts a price on those
emissions, encouraging people, businesses, and governments
to produce less of them. A carbon tax’s burden would fall most
heavily on energy-intensive industries and lower-income
households.

Policymakers could use the resulting revenue to offset those

impacts, lower individual and corporate taxes, reduce the
budget deficit, invest in clean energy and climate adaptation, or
for other uses.
 Utility of carbon taxes

1. Carbon taxes discourage the consumption of highly emissive

materials/sources of energy and incentivize the use of
renewable sources of energy.

2. Carbon taxes place the external costs of carbon emission on

the polluter and not on the public. This forces polluters to use
means of production which are less emissive and more
environmentally friendly.
 Utility of carbon taxes

3.If a maximum limit of emissions is set, beyond which such

emissions would be taxable, carbon taxes could be a
progressive system of taxation.

4.From an international trade perspective, India would protect

itself from being ostracised or penalised for not imposing a
carbon tax. Further, India would be able to bolster itself from
any adverse impacts on its exports.
 Impact of carbon taxes

Impact on Revenue: Taxing fossil fuels is one of the larger

contributors to exchequers globally and India is no exception.

A report estimated that a carbon tax @ $ 35 per tonne of CO2

emissions levied by India in phases from 2017 to 2030 can yield
more than 2% of GDP, thereby compensating the loss from
taxing fossil fuels.
 Impact of carbon taxes

● Impact on Innovation : Impact on Innovation: Carbon taxes

accelerate the development of innovative business models
around clean energy like solar powered automobiles, solar
drones, zero energy buildings, super grids, utility scale
battery production etc.
 Impact of carbon taxes

● Impact on Innovation : Impact on Innovation: Carbon taxes

accelerate the development of innovative business models
around clean energy like solar powered automobiles, solar
drones, zero energy buildings, super grids, utility scale
battery production etc.
● Impact on investment and employment

● Impact on health care Infrastructure

● Impact on Pollution
 Sustainable Investment and Finance

Crowd Funding:

Crowd funding is a method of financing that allows firms or

individual entrepreneurs to raise funds for their ventures
through relatively small contributions made by a large number
of individuals via the internet. In addition, it does not require
financial intermediaries, unlike capital or loan market activities.
 Sustainable Investment and Finance

Crowdfunding is the use of small amounts of capital from a

large number of individuals to finance a new business venture.

Kick-starter, Indiegogo, and GoFundMe are among the most

popular crowd funding platforms.

Advantages

1.It is an easy and useful way of raising funds.

2.Pitching a project or business through the online platform can
be a valuable form of marketing and result in media attention.
 Sustainable Investment and Finance

3.Ideas that may not appeal to conventional investors can often

get financed more easily.
4.It's an alternative finance option if you have struggled to get
bank loans or traditional funding.
5.It is a good way to test the public's reaction to your
product/idea - if people are keen to invest it is a good sign that
the your idea could work well in the market.
 Sustainable Investment and Finance

Disadvantages

1.It will not necessarily be an easier process to go through

compared to the more traditional ways of raising finance - not
all projects that apply to crowd funding platforms get onto
them.
2. If you don't reach your funding target, any finance that has
been pledged will usually be returned to your investors and you
will receive nothing.
 Sustainable Investment and Finance

Disadvantages

3.Failed projects risk damage to the reputation of your business

and people who have pledged money to you.

4.If you haven't protected your business idea with a patent or

copyright, someone may see it on a crowd funding site and steal
your concept.
 Sustainable Investment and Finance

Carbon Credit
A carbon credit is a tradable permit or certificate that provides
the holder of the credit the right to emit one ton of carbon
dioxide or an equivalent of another greenhouse gas – it’s
essentially an offset for producers of such gases. The main goal
for the creation of carbon credits is the reduction of emissions
of carbon dioxide and other greenhouse gases from industrial
activities to reduce the effects of global warming.
 Sustainable Investment and Finance

Carbon Credit
Companies that achieve the carbon offsets (reducing the
emissions of greenhouse gases) are usually rewarded with
additional carbon credits. The sale of credit surpluses may be
used to subsidize future projects for the reduction of emissions.
 Sustainable Investment and Finance

Carbon Credit
Companies that achieve the carbon offsets (reducing the
emissions of greenhouse gases) are usually rewarded with
additional carbon credits. The sale of credit surpluses may be
used to subsidize future projects for the reduction of emissions.
 Carbon credit

It is a tradable certificate or permit representing the right to

emit one tonne of carbon dioxide.

They provide a way to reduce green house effect on an

industrial scale.

Carbon credits are the certificates issued to countries that

reduce their emission of GHG which causes global warming.
 Carbon credit Certificate
For example if a project generates, energy using wind power
instead of burning coal, it can save 50 tons of carbon dioxide
per year.

How do you reduce carbon emissions

Use of renewable energy such as wind farms, installation of

solar.
Afforestation
Reforestation
Organisations should bring awareness
 Carbon credit Certificate
Reducing carbon emission by Individual

Drive less
Use solar energy
Plant more trees
Turn off Electric devices
Reuse and recycle
Be a citizen not just a civilian
 Advantages
• Technology transfer from developed to developing countries
• Better technology for company
• Can change country’s financial situation 
• Development of cleaner technologies 
• Environmental benefits 
• Good alternative option for investment
• Helps in developing extra income
 Disadvantages
 • Gives false sense of pollution
• It is not regulated 
• Developed countries purchase CER’s rather than finding new
ways to reduce emissions 
• lack of a comprehensive and structured international system
 Carbon credit traders in India
Grasim industries ltd.
Reliance energy ltd.
Tata motors ltd.
Tata steel ltd.
Reliance energy ltd.
Rajasthan renewable energy corporation.