Making a case for green bonds Editorial 11th Sep’19 FinancialExpress

Headline : Making a case for green bonds Editorial 11th Sep’19 FinancialExpress

Details :

Sustainable development by incentivising low-cost financing:

• The Earth Summit (Rio, Brazil, 1992) brought a paradigm shift in our concept of development with the recognition that environment and economic policies must work in tandem (that is, sustainable development) to improve the quality of life.
• One of the ways to incentivise sustainable development is through low-cost financing for sustainable projects.
• Developed world has already recognised the need of dedicated funds for greener projects at low cost.

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Green Bonds for raise low cost finances for green projects:

• Green bonds have emerged as a way to fund green projects that can reduce the cost of capital and improve returns.
• Green bonds are the same as corporate bonds, but their proceeds are preallocated to green activities.
• Examples:
  • Fund-raising through green bonds was done first in 2007 when the European Investment Bank raised 600 million euros under Climate Awareness Bonds.
  • The latest success story comes from Russian Railways, whose eight-year green bondraised 500 million euros and was priced at 2.2%.

 

Transport sector is a good candidate to raise funds through green bonds:

• Transport is responsible for 23% of all energy-related carbon dioxide emissions globally and 14% of total GHG emissions. Road transport alone is responsible for 73% of carbon dioxide emissions from all transport.
• Leveraging debt capital markets towards sustainable transport infrastructure development and services has a huge potential to help achieve climate goals.
• This can be seen from the fact that 71% of climate-themed bonds issued relate to low-carbon transport.
• This is due to a number of rail issuers, which have a long history of using bonds to raise finance.

Other areas most likely to get acceptance in the green bond market:

• As per the Climate Bonds Standard and Certification Scheme of Climate Bonds Initiative, certain areas are most likely to get acceptance in the green bond market.
• These include:
  • Alternative (low-carbon) energy refuelling distribution infrastructure
  • Vehicle technologies to significantly increase emissions efficiency (including fuel efficiency, fuel type and other vehicle improvements)
  • New vehicle technologies and hybridisation, autonomous/semi-autonomous vehicles

 

India also needs massive investment in green technologies:

• We need a far-sighted programme and creative solutions to address the environmental challenge.
• India is implementing the National Action Plan on Climate Change (NAPCC) to reduce emissions intensity—GHG emissions per unit of GDP—by 33-35% below 2005 levels by 2030.
• At least 40% of its energy in 2030 would be generated from non-fossil fuel sources.
• Achieving it requires massive investment as green technologies are capital-intensive.
• Financing can contribute a lot towards reducing the cost of doing business in a greener way.

Railways’ Green Bond Framework a success:

• The Indian Railway Finance Corporation (IRFC) set up a Green Bond Framework for fund raising.
• The proceeds were proposed to be used for financing the Dedicated Freight Corridor (DFC) and electrification of railways.
• The IRFC had raised $500 million in 2017 from the 10-year green bond through India INX, GIFT City.

Sometimes it has been easier to raise funds through green bonds:

• In June 2019, at a time infra companies struggled raising funds, Adani Green Energy’s green bonds worth $500 million were oversubscribed.

 

Way ahead:

• Issuing green bonds overseas:
  • The Economic Survey 2018-19 notes that India needs to almost double its annual spending on infrastructure at $200 billion, which will require harnessing private investment.
  • The finance minsiter, in her Budget speech, talked about international debt issuance.
  • Issuing green bonds overseas can help realise the goal of creating a clean environment.
• Setting up a Green Investment Trust:
  • The government can do well by setting up a Green Investment Trust, an agency for green financing, to fund green infrastructure projects.
  • The trust can tap green funds abroad and channel the same towards green projects in India.
  • The financial incentives in terms of low-cost funds will trigger infrastructure investments in clean transport.

 

Importance:

GS Paper III: Economy