A Green Bond is a duty absolved security issued by governmental qualified associations or by districts for the advancement of Brownfield locales (Brownfield locales are zones of land that are underutilized, have relinquished structures or are immature, regularly containing low levels of mechanical contamination). Green Bonds are short for qualified green building and supportable outline extends bonds. A Green Bond is like any other regular bond but with one key difference: the money raised by the issuer is earmarked towards financing `green’ projects, i.e. assets or business activities that are environment-friendly. Such projects could be in the areas of renewable energy, clean transportation and sustainable water management.
Purpose
The Green Bonds are issued for the purpose of funding business projects with the aim of bringing down the carbon footprint, or are aimed at sponsoring projects with low carbon footprint. The purpose of Green Bonds is to provide a sustainable renewable source of energy across the country. To bring down global warming by removing pollution from industrial projects and bring down the carbon footprint of any business. The Green Bond is highly important for India. It is so because India is planning to build a 175 gigawatt of renewable source of energy by 2022. This requires massive funding of approx 200 billion USD. To create the large infrastructure of power with clean energy, Green Bonds may serve the purpose of India.
Institution issuing Green Bonds
The green bond was issued by supranational organizations such as the European Investment Bank and the World Bank, as also governments, accounted for most of the green bond issue, between 2007– 2012. However, with the rise of corporate interest by 2014, green 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.
Investments in Green Bonds
- It is possible for any investor to invest in a green bond. A green bond is like any other bond where a debt instrument is issued by an issuer for raising funds from investors.
- However what differentiates a Green bond from other bonds is that the proceeds of a Green Bond offering are ‘ear-marked’ for use towards financing ‘green’ projects.
- These green bonds are guided by regulation and rules laid down by ILDS “Issue and Listing of Debt Securities” in 2008.
- Further it is possible to trade green bonds on exchanges. Axis bank of India launched the first certified green bond in the London stock exchange.
Eligibility to issue Green Bonds
But to issue green bonds certain criteria are to be met by the issuer. The criteria are as follow:
- The issuer of a green bond must declare that the bond is intended to be environmentally beneficial through labeling the bond. The label is most commonly ‘green’ however other labels such as climate-awareness, climate, environmental, carbon, sustainability and ESG (Environment, Social, and Governance) are also eligible.
- The issuer must use the label or description in a public document for the label to be valid. For example, the label can be used in reference to the bond in a press release from the issuer, statement on the issuers’ website, the bond prospectus or supporting bond offering documents.
- There are corporate houses which have already issued green bonds in India; they are Yes Bank, SBI, Exim Bank, Axis Bank and CLP Limited. These corporate houses met the global standard to issue the green bond. The basic three criteria are net worth requirement, rating parameters, and track record of the issuer.
Some of the climatic details to meet the criteria for eligible green project are as follow:
Renewable and Alternative Energy:
- Solar energy – photovoltaic solar electricity, concentrated solar power, infrastructure and manufacturing, transmission
- Wind energy – offshore and onshore wind farms, infrastructure and manufacturing, transmission
- Bio-energy – renewable feed stocks, infrastructure and manufacturing, networks
- Hydropower – Run of river and small hydro <15MW (CDM defined), existing large hydro >20MW in temperate zones, re-powering of existing large hydro system
- Geothermal – geothermal electricity, geothermal heat pump (GHP) technology
- Other renewable energy – sea and ocean derived energy sources
- Energy distribution & management – transmission & grid infrastructure, smart systems/meters, heating management
- Energy Storage – Hydro storage systems, thermal heat storage, new technologies.
Energy efficiency:
- Green building – commercial, residential, upgrades/retrofits
- Energy efficiency technology/products manufacturing and supply – operational performance will recognize special purpose products needed to ensure buildings meet industry metrics, such as LEED and BREEAM standards
- Energy efficient products – manufacturers, assets
- Energy efficient processes/systems
- Cogeneration/trigeneration/combined heat and power
- Waste heat recovery
- Non-energy GHG reductions
- Industrial process – eco-efficiency improvements/cleaner production.
Sustainable Water
- Storm water adaptation investment
- Investments to deal with rainfall volatility
- Water treatment and recycling
- Waterways adaptation
Waste, recycling and pollution
- Circular economy activities that lead to lower lifecycle energy and GHG usage: industrial recycling, recycled products, composting
- Technologies and products: products/technologies that reduce and capture GHG emissions.
Sustainable agriculture and forestry
- Forestry activities that avoid or substantially reduce carbon loss, and that deliver substantial carbon sequestration: certified assets (as per internationally accepted certification standards), afforestation (plantations on non-forested degraded lands), re-vegetation (reforestation on previously forested land), reduced emissions from deforestation and degradation (REDD)
- Agriculture that reduces carbon and GHG emissions, increases soil based carbon sequestration and improves climate resilience – reduced water use, verifiable reduced fertilizer use, verifiable zero-till agriculture, verifiable rangeland management, intensive agriculture efficiencies, intelligent management systems and resilience.
Climate resilient infrastructure and climate adaptation
- Infrastructure – bridges, rail, infrastructure to protect against increased rainfall
- Information technology and communications – broadband, data centres using renewable energy, low carbon infrastructure, products and technologies that support smart grid applications, technology substitution.
The criteria used and processes are under review through the following process:
Certified Climate Bonds:
- At issuance: Each bond reviewed by the Climate Bonds Standard Board
- After issuance: the issuer is required to submit a report from the verifier confirming compliance. This is reviewed by the Standard Board
All other green bonds:
- Bond review: Annual check of post-issuance reporting to ensure continued alignment with the criteria
- Criteria review: All criteria are reviewed at least annually in line with the Climate Bonds Standard. This is informed by the Technical Working Groups and Standard Board
- Process review: The process for reviewing bonds is reviewed internally each year by the Markets Team with input from the Standards Team and, where necessary, external experts.
The criteria used to determine bond eligibility are refined and improved as work is completed through the Climate Bonds Standard. The Climate Bonds Standard convenes Technical Working Groups consisting of key experts from academia, international agencies, industry and NGOs to develop sector-specific eligibility criteria for each low-carbon investment area. The end criteria for each low-carbon investment area are approved by the Standard Board and the technical working groups. Once criteria are finalized, they are used to inform the decision-making process for the index. While they cannot always be adhered to in full (the Standard requires different levels of disclosure), they are used to refine the taxonomy. The process for selecting bonds is reviewed annually through an internal process. Where necessary, the Board or external experts are consulted.
Exclusion for green bond
The following areas are ineligible for selection and are explicitly excluded from the list:
SEBI guidelines and detailed disclosure norms for green bond
The last meeting to introduce disclosure norms led down by SEBI on 19th JULY 2015 in meeting with CoBoSAC “Corporate Bond and Securitization Advisory Committee ” states the following:
The issuer of a green bond will have to make disclosure about environmental objectives of the issue of such securities in the offer documents, Securities and Exchange Board of India (SEBI) said in a circular. Besides, issues would have to provide details of the systems and procedures to be employed for tracking the proceeds of the issue, including the investments made and earmarked for eligible projects in the offer documents. In addition, the issuer would have to make disclosures including use of proceeds, list of projects to which green bond proceeds have been allocated in the annual report and periodical filings made to the stock exchanges. The issuer can appoint an independent third party reviewer, certifier or validator for reviewing, certifying and validating the pre-issuance and post-issuance process including project evaluation and selection criteria. However, this has been kept optional. The disclosure framework comes after SEBI’s board in January 2016 had approved norms for issuance and listing of such securities in the stock market.
However, what differentiates a green bond from other bonds is that the proceeds of a Green Bond offering are for use towards financing green projects.
According to SEBI, a debt security will be considered green bonds if the funds raised through it will be used for renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology. Among others, such funds would be used for clean transportation; sustainable water management; climate change adaptation; energy efficiency including efficient and green buildings; and sustainable waste management.
Green Bond is the next step to a future investment framework to build a world with a clean source of sustainable energy.
