MINTING “GREEN”

Don’t you think the 21st century is more synonymous with Environment depletion, pollution and, degradation? ” A growing number of investors wish to make profits and do good at the same time. They want their portfolios, or part of their portfolios, to be “ESG” – that is to support environmental social, and governance causes.” With efforts taken to “GREEN” the financial system there lies the concept of GREEN BONDS. Source

GREEN BONDS

In its most basic form Green Bonds function by generating funds from investors to develop environmental or eco-friendly projects, in which environmental outcomes are potentially achieved and then investors are paid with interests.

CASE

A capital and an energy-intensive company can use a green bond to fund the company’s use of WHRS (Waste Heat Recovery System). The WHRS harnesses waste heat from exhaust gases discharged in industries and converts it into a source of electrical energy. Over here use of WHRS has a prolonged cost saving which is linked to its bond repayment and meeting its environmental objective by minimizing carbon emissions.

Attaching Green Bond with Pay Performance?

There always has to be a third party when it comes to an enterprise undertaking sustainable objectives. In the example above the use of WHRS will require third party contractors who build infrastructure and install the technology. These contractors have the power to ensure that projects meet performance expectations, more than the company who administered the bond. The Bond issuer should link the WHRS contractor’s financial incentives to the bond repayment structure to ensure the achievement of sustainability through innovative ways and new technology.

GREEN FINANCE IN INDIA

“India has the potential to be a large market for green finance which will have a positive impact on both the Indian economy and environment,”

– India & UK working group on Green Finance.Source

A new green trading platform has been developed earlier this year as the Bombay Stock Exchange (BSE)’s international arm, INX India. GSM Green serves as a platform for fundraising and trading green, social, and sustainable bonds exclusively. 

“… with a dedicated green platform, issuers, investors and traders will find it more convenient to list and trade green, social and sustainable bonds,”

CEO V Balasubramaniam said. Source

Over the last few years, a lot of renewable energy companies have shown interest in issuing green bonds. Recently, Urja Global Limited has received approval to raise green bonds of up to $500 million to fund its environmental oriented renewable projects and Electric Vehicles (Evs). Azure Power Solar Energy Private Limited has also announced that it would issue a green bond offering of $350 million (~25 billion). The bond is expected to mature in 2024 with an expected US Dollar coupon of 5.65%. The Hyderabad-based Greenko group with a $950 million green bond, made its biggest contribution to the global green bond market.

Adani Green Energy Chief Financial Officer Mr.Ashish Garg said – ” We are excited that a platform like Global Securities Market with a dedicated green segment is being offered now at India INX in India’s very own International Financial Services Centre. This was a long pending gap and will encourage more green financing in the country.”   Adani Green Energy Limited (AGEL), the renewable energy arm of Adani Group has raised $ 362 million by selling green bonds with a tenure of 20 – years, the company informed exchanges on Friday i.e 4th October. The bond will bear interest at the rate of 4.625 percent a year, payable semi-annually. They will be listed on the Singapore Exchange Securities Trading platform. In August, Adani Green had signed an agreement with Essel Infra to buy its 205 megawatts (Mw) of solar assets for Rs 1,300 crore. The acquisition of 205 Mw of operating solar assets has strengthened Adani Green Energy as one of India’s major renewable power producers. Adani Green Energy is a forerunner for a potential dollar bond as Prime Minister Narendra Modi announced the more ambitious plans.

STOCK MARKET RESPONDS POSITIVELY TO THE ANNOUNCEMENT OF GREEN BOND ISSUES

This is how AGEL stock prices got affected by the Green Bond announcements.

FISCAL BENEFITS ATTACHED WITH GREEN BONDS

India has set a target to reduce the ’emissions intensity’ of its GDP by 33-35% by 2030 from the 2005 level. The Capital requirement is to be fulfilled primarily by the private sector. With the target investment of $370 billion on infrastructural development, a paper supporting notions of executives of the major Investment Banks stated that – 

“Indian government should think of providing tax incentives to mutual funds and their investors for investing in local green bonds. A debt fund where more than 80% of the assets are invested in green paper, can benefit from tax incentives for its investors – where effectively the tax rates are reduced from the current applicable tax rate on income arising from such investments.”

Source

GREEN BONDS AT MACRO LEVEL

Firms that have adopted green bonds benefit from both positive financial and environmental outcomes. Green bonds have grown rapidly over the last decade. The green bond market is largely dominated by three countries. China with $83 billion worth of green bonds issued over the last decade. The United States with worth $58 billion and France worth $57 billion. India still lags behind these countries but is one of the fastest-growing green bond markets in Asia with worth $5.2 billion for the year 2018. Commentators often see green bonds as a promising tool to address climate change, following the issuance of green bonds companies can reduce their CO2 emissions and achieve a higher environmental rating.

OPPORTUNITY to ‘GREEN’ THE FINANCIAL SYSTEM

Apart from “HOW DARE YOU” motions this is where we can contribute to creating a sustainable world.  Where our government can frame guidelines for mutual fund houses and insurance companies to encourage investments in green bonds as at present it has a limited investor base. With the pick-up in green bonds floating and annual issuance, a certain long-term minimum investment level can be encouraged or mandated. Where industries have an added advantage to take up environmental friendly methods of business, we end up minting GREEN. 

GO GREEN INVESTMENTS !!!

Author
Radhika Sharma
Team Member-
Fixed Income
(M.Sc. Finance, NMIMS – Mumbai. Batch 2019-21)

Connect with Radhika on LinkedIn

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s