Global population growth, along with economic growth, brings sustainability challenges such as global warming. Escalating carbon dioxide emissions lead to larger prospects for ‘greening’. India, for instance, needs a mammoth $200 billion as climate finance to help de-carbonise the economy.

Green bond issuance is officially recognised by UNFCCC (UN Framework Convention on Climate Change) as a “climate action to finance” ahead of the 21st Conference of Parties (COP21) in Paris. The US’ sudden exit from its one-time commitments under the Green Climate Fund (GCF) paired with the change in priorities under the Trump administration has put further pressure on India and other emerging nations to source independent climate finance with lesser dependence on international grants.

Leveraging the debt market, green bonds have emerged as an innovative financial tool in recent years serving as a successful bridge between capital markets and addressing climate change. A green bond is nothing but a regular bond whose proceeds fund projects with tangible environmental benefits.

Green bond market

The Climate Bond Initiative (CBI), in its recent update, revealed that India’s green bond market is currently around $3 billion. About 68 per cent of the funds are set aside for renewable energy projects, followed by the low carbon transport sector and low carbon buildings accounting for 21 per cent and 10 per cent, respectively. This can be part of the construction of 100 smart cities through market interventions.

So far, the growth of green bonds in India has been phenomenal. Surprisingly, during June-September 2017, India retained its position among the top five issuers of green bonds globally.

Green bonds provide lower cost, long-term capital and stable funding for renewable energy projects regardless of an individual government’s policy support for clean energy, thereby offering a competitive risk-return profile unlike conventional bonds.

They provide access to domestic as well as foreign capital and have further attracted new institutional investors with climate mandates. They hence play a key role in meeting these investors’ Environment, Social and Governance (ESG) objectives. They also offer a hedge against carbon transition risks in portfolios that include emissions-intensive assets.

Transforming India into a strictly green economy largely entails concerted efforts on twin fronts — access to finance and its effective deployment. Since its first issuance in 2007 by the World Bank and European Investment Bank, green bonds have grown exponentially as a key tool to raise climate finance, with cumulative issuances pegged at over $180 billion globally by the end of 2016.

However, the major challenges for India’s green bond market include not-so-robust regulatory monitoring mechanisms, high currency hedging costs, poor sovereign rating (BBB-), lower tenures, lack of standardised reporting and exposure to credit risks.

As of January 2017 (CBI Report), Asia has surpassed green bond issuers in comparison to Europe, Northern America, Africa, Latin America.

With climate change seizing centre-stage in policy decisions universally, innovative thinking in climate finance can make a difference here.

The writers are Senior Research Fellows, Faculty of Management Studies, University of Delhi.