Find the funds for green projects

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Earlier this year, India joined 193 countries at the United Nations’ Sustainable Development Goals summit to adopt an ambitious new global development agenda driven by 17 goals and 169 targets. The SDGs are an expansion over the Millennium Development Goals that were adopted in 2000 and expire this year.

The MDGs were vague and had limited scope whereas the SDGs, which have integrated environment, social and economic dimensions, are one the most comprehensive lists of global goals for attaining sustainability accompanied by an exhaustive set of indicators.

The SDGs have been designed to facilitate greater scope for public debate, besides compelling Governments to approach sustainable development as a collective exercise. India hopes to achieve its SDGs by 2030 but this is only possible if financial resources to implement the SDGs are sufficiently available.

Implementing SDGs in India by 2030 will cost an estimated US$14.4 billion. With public sector balance sheets stretched and bank capital increasingly constrained, there is likely to be a significant funding gap that will affect green initiatives. Given this financial scenario the implementation of sustainable development programmes will suffer, unless new sources of capital are discovered.

Green bonds as fixed-income and liquid securities have emerged as dependable sources for raising funds for clean energy, climate mitigation and other sustainable initiatives. Countries such as China have already realised that public funds will cover only about 10 to 15 per cent of the green investments required  and have started to actively pursue green bonds.

India too has major financial requirements to fund green projects. For instance, India’s ambitious target of building 175 gigawatt of renewable energy capacity by 2022, from just over 30 gigawatt now, requires a massive $200 billion in funding. High interest rates and unattractive terms under which debt is available in India raises the cost of renewable energy by 24 to 32 per cent, compared to the US and Europe. This makes green bonds a viable and effective alternative due to low interest rates.

India made an impressive move in March, with the Export-Import Bank of India, commonly known as Exim Bank, issuing a five-year $500 million green bond, which is India’s first dollar-denominated green bond. The issue was subscribed nearly 3.2 times. The net proceeds are expected to fund eligible green projects in countries such as Bangladesh and Sri Lanka. Similarly, in February, Yes Bank raised Rs1,000 crore via a 10-year green bond, which was oversubscribed twice.

But these efforts may not be sufficient by themselves given the substantial scale of green initiatives planned and the corresponding financial requirement. India needs to  adopt strategies to leverage green bonds on a larger scale in order to ensure viable financing for green projects.

The first step in this direction can be to rope in institutional investors such as pension funds and insurance companies. According to the September 2014 UN climate change summit, institutional investors with $43 trillion assets under management globally are ready to invest in green initiatives. Green bonds can provide compelling benefits for these institutions in leveraging their capital for investment in assets in the real economy, besides benefitting the environment.

But in order to realise the full potential of green bonds, India must ensure that no malpractice takes place in the manner in which green bonds are handled. For instance, there have been serious debates about whether the projects targeted by green bond issuers are green enough. A few months ago, Reuters reported that activists were claiming that the proceeds of the French utility GDF Suez’s $3.4 billion green bond issue were funding a dam that hurts the Amazon rainforest in Brazil.

Moreover, India must also ensure that the ratings and tenure of the bonds are improved in order to encourage investors. Currently the green bonds in India have a short tenure of 10 years whereas a typical loan will be for minimum 13 years. This is also less compared to many international issuances. In addition, many target buyers of Indian green bonds may not invest in any bonds that are rated lower than ‘AAA’.

Globally, a record $38.8 billion in green bonds were issued in 2014, 2.6 times the $15 billion issued in 2013, and most of the bonds were oversubscribed. This shows global confidence in this tool of raising affordable finance for green initiatives. With adequate safeguards and diligence in place to prevent any malpractice or inefficiencies, India must capitalise on the concept of green bonds to support its environmental projects and achieve its sustainable development goals.


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