GREEN BOND: A Concept to Move Towards Carbon Neutrality : Daily Current Affairs

Relevance: GS-3: Conservation, environmental pollution and degradation.

Relevance: GS-2: Government policies and interventions for development in various sectors.

Key phrases: Green bond, climate-related or environmental projects, World Bank, SEBI, CSR, Borrowing costs.

Why in News?

Union Finance Minister Nirmala Sitharaman on Tuesday announced plans to issue sovereign ‘green bonds’, a concept catching up globally, to move towards carbon neutrality.

What is Green Bond?

A green bond is a fixed-income instrument designed specifically to support specific climate-related or environmental projects.
Green bonds are the bonds issued by any sovereign entity, inter-governmental groups or alliances and corporates with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable. Green bonds may come with tax incentives to enhance their attractiveness to investors.
The World Bank is a major issuer of green bonds. It has issued 164 such bonds since 2008, worth a combined $14.4 billion.
In 2020, the total issunce of green bonds was worth almost $270 billion, according to the Climate Bond Initiative. The cumulative issuance since 2015 is over $1 trillion.

Green Bond In India

India has started emphasising on green finance as early as 2007. In December 2007, the Reserve Bank issued a notification on “Corporate Social Responsibility, Sustainable Development and Nonfinancial Reporting – Role of Banks” and mentions the importance of global warming and climate change in the context of sustainable development.

In 2008, The National Action Plan on Climate Change (NAPCC) was formulated with a vision to outline the broad policy framework for mitigating the impact of climate change.

The Climate Change Finance Unit (CCFU) was formed in 2011 within the Ministry of Finance as a coordinating agency for the various institutions responsible for green finance in India.

The major strategic move since 2012 included implementation of the sustainability disclosure requirements. Security and Exchange Board of India (SEBI) made it mandatory for top 100 listed entities based on market capitalisation at BSE and NSE to publish annual business responsibility reports since 2012.

India started issuing green bonds since 2015. India's first green bond was launched by Yes Bank Limited in 2015 to raise INR 5 billion to enhance long-term resources for funding infrastructure projects in renewable and clean energy projects such as wind, solar, biomass and hydropower.

In May 2017, SEBI issued guidelines for green bond issuance specifying the disclosure requirements. In addition, the Ministry of Corporate Affairs imposed mandatory reporting of the progress on Corporate Social Responsibilities (CSR) under the Companies Act, 2013.9

In October 2017, Report of the Committee on Corporate Governance has proposed that the board of directors shall meet at least once a year to specifically discuss strategy, budgets, board evaluation, risk management, ESG and succession planning. There have been several fiscal and financial incentives at work in India.

As of February 12, 2020, the outstanding amount of green bonds in India was US$16.3 billion India issued green bonds of about US$8 billion since January 1, 2018, which constituted about 0.7 per cent of all the bonds issued in the Indian financial market. Although the value of green bonds issued in India since 2018 constituted a very small portion of the total bond issuance,

Challenges of Green Bond Finance in India:

Lack in general awareness: There is a paucity of data for assessing the awareness regarding green finance and sustainable development from conventional sources. In this regard, Google Trends can be a powerful tool for understanding the pattern of google searches made in different locations at different point in time. It can help us understand the interest on a given topic, based on the number of searches made in Google. Evidence based on Google Trends suggests an increase in awareness in green finance and its role in sustainable economic development.
High Coupon Rate: The cost of issuing green bonds has generally remained higher than the other bonds in India. The average coupon rate for green bonds issued since 2015 with maturities between 5 to 10 years have generally remained higher than the corporate and government bonds with similar tenure. For the US$ denominated green bonds with tenure of more than or equal to 10 years, the coupon rate was, however lower than the corporate bonds. It may be mentioned that most of the green bonds in India are issued by the public sector units or corporates with better financial health
Information asymmetry: High borrowing cost has been perhaps the most important challenge and our analysis indicates that it could be due to the asymmetric information.
In India, while there have been improvements in public awareness and financing options, the major challenges could be high borrowing costs, false claims of environmental compliance, plurality of green loan definitions, maturity mismatches between long-term green investment and relatively short-term interests of investors.
Lack of Credit Ratings: Lack of credit rating or rating guidelines for green projects and bonds

Way forward:

Given the large size of domestic market and much smaller penetration of green instruments so far, there remain vast opportunities to be tapped. In this context, some of the studies noted the importance of (a) increased coordination between investment and environmental policies and (b) an implementable policy framework for both national and state levels in addressing the existing frictions.
Therefore, developing a better information management system in India may help in reducing maturity mismatches, borrowing costs and lead to efficient resource allocation in this segment
Green Bond is fast emerging as a priority for public policy. Our findings indicate that there have been some improvements in public awareness and financing options in India in recent years.
Existing literature suggests that a reduction in the asymmetric information regarding Green Projects through better information management systems and increased coordination amongst stakeholders could pave the way towards sustainable long term economic growth.
At this juncture, the world is fighting COVID-19 and its impact on global economic growth. Undoubtedly, the immediate policy challenge is to kick-start the global economy.
However, the pandemic has also offered an opportunity to all stakeholders to rethink about the policies, and financial and operational strategies that they have adopted so far and espouse an approach that is more environmentally sustainable in the long run. Green Bond is definitely an important mean that can facilitate such a shift towards sustainable economic growth.
Sovereign ‘green bonds’ are also very welcome, which can help mobilise financial resources for distribution companies as well as for clean energy investors.

Source: The Hindu

Mains Question:

Q. The Government of India has also been taking proactive policy measures to promote and support green Bond initiatives. Discuss the importance of Green Bond towards attaining carbon neutrality in India. Illustrate.