The Climate-Friendly Investment

IN the throes of a worldwide recession in 2008, when investors had limited reliable fixed income investment options, and fewer still that specifically supported environment-friendly projects, the World Bank Treasury issued its first green bond. Green bonds, an increasingly popular source of finance worldwide, are fixed income, liquid financial instruments that are exclusively used to raise funds dedicated to climate-mitigation, adaptation, and other environment-friendly projects.

Now, Indian banks are considering launching these financial instruments, with at least one private sector bank – Yes Bank – planning to launch green bonds by the end of the month. Said Rana Kapoor, Managing Director & CEO, Yes Bank, “It is vital to develop large, global, sustainable and responsible banks. As public trust institutions, banks, as baskets of the economy, can play a tremendous role in forging a corporate vision for sustainability. Prudent financial innovation, skilled people and responsible stewardship are needed to address concerns of climate change.”

Last year, the state-run Indian Renewable Energy Development Agency Ltd. raised about $117.8 million selling tax-free bonds to help finance renewable energy and energy efficiency projects.

In the last 7 years, the World Bank has issued more than $7 billion in green bonds in 17 currencies, and the International Finance Corporation (IFC) has issued $3.7 billion in green bonds. In India, IFC green bonds are helping companies recycle e-waste from computers, discarded mobile phones and other electronics that can be harmful to the environment and to peoples’ health.

Analysts say that in the Indian context, renewable energy projects are provided with relatively short-term loans incurring high interest rates; green bonds could provide an additional avenue of direct financial access besides ensuring long-term viability of such projects in India.

So far, green bonds have been slow to catch on because of extensive regulations and guidelines according to international norms that are required by the private sector banks and issuers. But with the government’s renewed focus on sustainability in energy and environment, companies could be incentivized to offer, and opt, for such instruments to not only enhance their sustainability footprint and brand image, but also participate in India’s long-term growth strategy.

“Green bonds have opened a new finance flow that will be essential to confronting climate change,” says Rachel Kyte, World Bank Group vice president and special envoy for climate change. “They are providing green investment opportunity for an ever wider investor group, including those who wish to divest and diversify from fossil fuel-intensive portfolios, and they have proven that a stream of investor capital exists for green assets.”

A concerted effort to regulate and standardize green bonds offered by both the government and the private sector could cut India’s clean energy cost by 25 percent, according to one study, and revitalize renewable energy, energy efficiency, sustainable transportation and other low-carbon projects.