Climate change is not only an environmental issue but also a threat to the financial system.
‘Green finance’ is now increasingly been seen as a viable option to combat climate change and ensure a sustainable future.
‘Green Finance’ is any structured financial activity that’s been created to ensure a better environmental outcome. It includes debt mechanisms, array of loans and investments, which are used either to encourage development of green projects or mitigate the impact on climate by regular projects, or a combination of both. ‘Green bonds’ open up a new pool of liquidity for a company’s funding requirements.
According to British non-profit Climate Bonds Initiative, the world issued $106.86 billion of green bonds in the three months ended March 31, 2021. Amidst the Covid challenges, global green bond issuance reached a record high of $269.5 billion in 2020, per a Climate Bonds Initiative report.
The report also indicated that the cumulative green bond issuance crossed over $1 trillion and stood at $1.05 trillion in 2020, registering an average annual growth rate of 60 per cent since 2015. The report also indicated that globally, green bonds are blossoming and expected to touch $2.36 trillion by 2023.
In the last few years, green bonds have become quite popular among Indian and global issuers. Globally, issuance of sustainable finance bonds during Q1 2021 more than doubled year-on-year. As of 2021, India has the second-largest emerging green bond market after China.
It was in 2015 that India stepped into the green bond market with YES Bank issuing the first green bond for financing the renewable and clean energy projects. Over the years, this market has expanded to several state-owned commercial banks, public sector undertakings, state-owned financial institutions, corporates, and the banking sector.
The GIFT IFSC gave a new thrust to ‘Sustainable Financing’ not only with its beneficial tax regulations, but also ensuring robust regulations encouraging greater participation from within and outside India. Sustainable financing got a boost from this jurisdiction because of its superior quality of infrastructure, regulatory environment, sustainable local economy, quality of life and strategic location. In fact, GIFT is becoming a preferred platform for listing of green bonds.
IFSCA has already initiated some progressive steps and on the back of a reinvigorated regulator and regulatory framework, it is certain GIFT IFSC will go a long way in positioning India as an international financial centre. With IFSCA at the helm, providing the necessary boost in terms of robust regulatory environment, and the IFSC enjoying right infrastructure and strategic location, sustainable finance got a new thrust.
But despite these impressive strides some barriers remain. The lack of sector diversification in green bond issuances limits finance of unconventional climate projects. Due to the newness of the instrument and lack of understanding of all its implications, some domestic investors are wary of investing, seeing them as high risk investments. Further, there is a dire need for methodologies and frameworks for evaluating diverse projects especially in the Indian context.
The kind of resilience shown by green finance markets led to a record year of issuance, rekindle a bright outlook for green bonds in 2021 and beyond. Some global investment banks say they expect a record $650 billion in global sustainable bond issuances in 2021. The US rejoining the Paris Climate Accord, and the growing focus to support the decarbonisation of energy-intensive industries can boost green bonds issuances.
The GIFT IFSC can act as an investment gateway for India apart from providing a global financial platform including ‘Green Finance’.
The writer is MD & CEO, India INX