A green bond is a debt instrument with which capital is being raised to fund ‘green’ projects, which typically include those relating to renewable energy, clean transportation, sustainable water management etc. The concept is relatively new for Green Bonds and it should be watched closely. Though since 2018, green bonds constitute only 0.7% of the Indian market currently India is the 2nd largest green bond market following China.
With generic corporate and municipal bonds, the money raised can be distributed at the company or government’s discretion. This is where Green Bonds stray from the pack. Rather than just being loans for companies, money generated from green bonds is “required” to be used for environmentally friendly projects. For instance, Adani Green Energy raised US$ 750 million from the issuance of green bonds with a 3-year maturity period.
Green bonds are bounded by the green bond framework where the company should clearly indicate which environmental issue is being addressed with the detailed metrics used to measure the impact of project. In India, these are regulated by SEBI itself.
The salient feature of green bonds is that though proceeds are raised for a declared green project, repayment is tied to the issuing company and not the success or failure of the projects. Thus, the onus of payment of interest and principal lies with the issuing company and is not based on the performance of the project.
As of now, a few banks such as SBI, Yes Bank, Axis Bank, etc., have mobilized funds and these bonds are listed on India International Exchange (INX), a wholly-owned subsidiary of BSE. India INX’s Global Security Market is India’s first debt listing platform that allows raising funds in any currency by both foreign and Indian issuers from investors across the globe.
Though green bonds are now in the mainstream the lack of contractual protections for investors, transparency and reporting metrics, issuer confusion, greenwashing (deceptive promotion of the product aiming environmental friendliness) still poses challenges for it to grow.