5 Basics knowledge about green bonds
- What are green bonds? A green bond is like any other regular bond but with one key difference: the money raised by the issuer are 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.
What are its benefits? Green bonds enhance an issuer’s reputation, as it helps in showcasing their commitment towards sustainable development. It also provides issuers access to specific set of global investors who invest only in green ventures. With an increasing focus of foreign investors towards green investments, it could also help in reducing the cost of capital.
3. When did the concept start? In 2007, green bonds were launched by few development banks such as the European Investment Bank and the World Bank. Subsequently, in 2013, corporates too started participating, which led to its overall growth. History of the green bonds started with Yes Bank which was the first bank to come out with a green bonds issue worth Rs 1,000 crore in 2015. Following this, few other banks too had green bond issuances.
4. Has regulatory authority’s mandated additional rules on such issues? For designating an issue of a corporate bond as green bond, an issue apart from complying with the issue and listing of debt securities regulations, would have to disclose additional information in the offer document such as use of proceeds.
5. What are the avenues where these funds can be invested? Regulator’s indicative list includes renewable and sustainable energy such as wind and solar, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable waste management and land use and biodiversity conservation.
For instance, in Nigeria, Green Bonds are any type of bond instrument where the proceeds are exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects that align with the four core components of the Green Bond Principles (GBP).
Types of Green Bonds
There are currently four types of Green Bonds (additional types may emerge as the market develops and these will be incorporated in annual GBP updates):
- Standard Green “Use of Proceeds” Bond: a standard recourse-to-the-issuer debt obligation aligned with the GBP.
- Green Revenue Bond: a non-recourse-to-the issuer debt obligation aligned with the GBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds go to related or unrelated green project(s).
- Green Project Bond: a project bond for a single or multiple green project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the GBP.
- Green Securitized Bond: a bond collateralized by one or more specific green project(s), including but not limited to covered bonds, ABS, MBS , and other structures; and aligned with the GBP. The first source of repayment is generally the cash flows of the assets.
Green bonds provide all the benefits that regular bonds provide such as low risk, fixed regular income, tradability, tax savings and capital appreciation.
Benefits to Issuers
Diversification and/or expansion of the investor base
- Access to new investors such as sustainable funds (which consider Environmental, Social, and Governance issues – ESG), investors with a specific mandate to buy green bonds or with long-term goals (such as pension funds and insurance companies).
- Potential to attract new investments at cheaper costs, on account of the huge demand for bankable green projects over their supply.
- More visibility for the green projects.
- Positive marketing instrument differentiating the issuance of green bonds from conventional issuances.
- Recognition of Issuer’s commitments related to environmental conservation and to mitigation and prevention of the risks posed by climate change.
- Improve issuer’s sustainability goals and develop closer relationships between finance and sustainability professionals.
Benefits to Investors
More transparency in the use of resource
- The projects funded by green bond proceeds are often structured within the company’s long-term strategy and should be aligned with its policy for social and environmental responsibility and governance model for sustainability issues.
- The clarity and demonstration of the use of proceeds in green projects as well as its monitoring may reduce the risks associated with investments.
Convergence with voluntary commitments
- For specialist investors with sustainability mandates, the availability of green bonds facilitates the identification of projects and target assets in the fixed income market.
- Investments in green bonds facilitate the fulfilment of commitments for asset managers that are signatories to the PRI2 (Principles for Responsible Investment) and IIGCC3 (Institutional Investors Group on Climate Change). These commitments which were undertaken by close to 2,000 organizations in international markets direct investment in projects that promote sustainable environmental and social development.
Benefits to Financial Market
- Green bonds enhance the reputation of institutions that offer green bonds and also promote interests in investments that deliver sustainable development;
- Green bonds attract investors outside the domestic financial markets;
- Green bonds foster a greater level of transparency and institutional accountability in the delivery of sustainable development.
Green Bond Principles
The Green Bond Principles (GBP) are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond. The Green Bond Principles recommend a clear process and disclosure for issuers, which investors, banks, underwriters, placement agents and others may use to understand the characteristics of any given Green Bond. The GBP have four core components:
- Use of Proceeds
- Process for Project Evaluation and Selection
- Management of Proceeds