Of bonds, green and not so green

A green bond is a green bond is a green bond – is that true?  Unfortunately, “green bond” is not a standard, well defined term.  Green bonds come in all shades of green, from the lightest tea green to the darkest ocean green, if you like.  A good way to evaluate the “greenness” of a bond is to see, if it makes a material difference to investment decision of the investors – in terms of an outright yes/ no, the maturity, the return expectation or the risk appetite. The bigger such influence, the “greener” the bond.

  • The green bonds currently available in India are marketing gimmicks
  • A real green bond needs to impact investment choices and improve financing conditions for developers
  • This would be a good option for the government to accelerate the market  

With severely restricted bank lending appetites for the Indian power sector, we desperately need new sources of financing for the growing renewables sector. Recently, Yes Bank and EXIM Bank of India have both launched “green” bonds and there is much excitement in the market that this could be the magical solution to India’s renewable financing needs.

A closer look shows, however, that the bonds issued by Yes Bank and Exim Bank are of the lightest tea green type. This money may be raised for financing renewable projects but there are no specific covenants or structural limitations on end use or any cost of capital advantage associated with them. They are essentially called “green” for marketing purposes, to capitalise on the growing buzz around the renewable sector. And in all likelihood, the buyers of these bonds would have gone ahead and bought these bonds even if they were not “green”. The classification really made no critical difference to them beyond perhaps, a gentle feel good factor.

So what would a dark green bond look like? Such a bond should have structural distinguishing characteristics from a plain vanilla bond. It should have a material impact on the intentions of the bond issuer as well as investors and play a key role in the investment decision process. That could be achieved in multiple ways. For example, the government could give tax incentives, whereby if an institution like IREDA or even a private company issued bonds specifically for financing the renewable sector, the investors would get certain tax benefits. Such a benefit is already provided by the government for many other sectors, including housing (HUDCO), railways (IRFC) and roads (NHAI). On the back of such incentives, these institutions are able to raise up to 20-25 year monies at attractive rates, which wouldn’t have been possible otherwise.

Or the government could also impose an investment obligation on mutual funds, pension funds or insurance companies to invest a certain percentage of their corpus into instruments for financing the renewable sector. The structural differentiation doesn’t have to come from the government alone. Many institutional investors in the West have specific investment mandates whereby they earmark a certain share of their corpus for investment in socially and environmentally beneficial projects. Hence, the issuers specifically target these monies and are happy to provide covenants on end uses of these funds. In turn, they get the benefit of cheaper capital.

Unfortunately, there is unlikely to be investor driven demand for green bonds in India as we simply don’t have the same level of environmental consciousness in India as in the West. This market needs government diktat or incentives to take off.  Otherwise, the prospects of ocean green bonds appear dim for now. More funds at lower rates and longer tenures is exactly what the market needs to thrive. The government has understood that – it has been mentioned many times by the Minister of Energy Piyush Goyal. However, we are still waiting for the action. An ocean green bond would be a very effective tool to transform the government’s ambitious targets from fantasy to reality.

Vinay Rustagi is the Managing Director at BRIDGE TO INDIA

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