Green bonds, which finance environmentally friendly businesses and assets, have emerged as one of the key financing mechanisms driving the global economy’s transition to a greener future. Since the issuance of the first green bond in 2007 by two multilateral development banks (World Bank and European Investment Bank), the green bond market has grown exponentially and is currently pegged at over $180 billion in cumulative issuance. Penetrating markets across developed and emerging economies, green bonds have seen extensive participation from corporates and financial institutions, including sovereign and municipal bodies.
A groundbreaking year for green bonds was 2015. Global markets witnessed currency green bonds and innovative structuring along with maiden green bond issuance in a number of countries. The green bond market was further strengthened with issuance doubling to $81 billion in 2016 from $42 billion in 2015. Supported by market-driven state policies and marked by a rapid growth in green bond issuance in India and China, the Asian market has emerged as a frontrunner in the green bonds space.
Contributing to sustainable growth
India’s green bond market has witnessed a number of critical milestones following Yes Bank’s and India’s first green infrastructure bonds issued in February 2015. A growing number of corporates and financial institutions have leveraged this innovative mechanism to raise capital, attracting foreign investments and inducing momentum in the market.
India also witnessed its award-winning first green masala bond (rupee-denominated bond), with the International Financial Corporation raising an off-shore rupee bond on London Stock Exchange for investing in Yes Bank’s green bond, demonstrating how innovations in emerging markets have the potential to capture global attention.
Green bond issuance in the country witnessed a 30 per cent year-on-year increase in 2016, cumulatively amounting to about Rs.18,131 crore (equivalent to $2.7 billion) and making India the seventh largest green bond market globally.
These green bonds have been crucial in increasing financing to sunrise sectors like renewable energy, thus contributing to India’s sustainable growth.
The Climate Bond Initiative, in its India update, indicated that about 62 per cent of the green bond proceeds have been allocated to renewable energy projects, followed by the low carbon transport sector and low carbon buildings accounting for 17.5 per cent and 14 per cent of the proceeds, respectively. At 2.2 per cent for each, the allocation of green bond proceeds towards water management and waste management has been somewhat limited owing to perceived sector-specific issues as well as due to projects being smaller in size and geographically dispersed.
Indian regulators have shown exemplary foresight in recognising green bonds as a key tool towards financing the nation’s climate change targets and in guiding the development of the green bond market through necessary policies and reforms.
In January 2016, the Securities and Exchange Board (SEBI) of India published its official green bond guidelines and requirements for Indian issuers, placing India amongst a select set of pioneering countries who have developed national level guidelines.
In addition to SEBI’s guidance on green bonds, the Reserve Bank of India passed regulatory reforms aimed at strengthening and expanding India’s corporate bond market. The extent of partial credit enhancement provided by banks has been increased to 50 per cent from 20 per cent of the bond issue size, while also permitting banks to issue masala bonds — key moves that will bolster the Indian green bond market.
Expectations from 2017 and beyond
The full potential of India’s green bond market remains untapped, with only a limited number of issuers so far. With increasing interest from the government and market regulators, 2017 is expected to see further developments in terms of innovations and supporting policy and regulatory frameworks aimed at bringing more clarity and impetus to the space.
Further to the interpretation indicated in SEBI’s green bond guidelines on what classifies as ‘green’, there is a need for developing a formal definition of ‘green’ to ensure understanding across sectors. A more descriptive and exhaustive classification from Indian regulators and policymakers in the coming years would be crucial in expanding the green bond market further.
Following global trends, the upcoming year is poised to witness the first ‘blue bond’ issuance (bonds used to specifically finance water infrastructure) in India. Globally blue bond issuances have crossed $10 billion, with India yet to enter the market. Given the rising financing gap in India’s water sector, it is imperative to utilise such innovative mechanisms for water infrastructure augmentation as well.
While credit enhancement has given an impetus to green bonds and will remain crucial, there is a scope for other innovative mechanisms such as securitisation. Many standalone green projects such as roof top solar, energy efficiency and rural water supply still remain unattractive to institutional investors owing to the smaller scale and vast geographical spread. Aggregation and securitisation of such projects could be a welcome move in providing mainstream debt to small-scale green projects.
The recent drive by the Prime Minister to resuscitate the municipal bond market for water supply projects in cities such as Pune and Hyderabad is highly commendable. The Indian government’s ambitious push for smart cities has opened emerging points that may be suitable for private sector participation and may soon culminate into India’s first green muni bond.
With an eventful year gone by, especially the formalisation of the Paris accord at the COP22, 2017 promises to deliver on some of the commitments undertaken globally for green financing.
With developed countries reaffirming their $100 billion mobilisation goal per year by 2020 to support climate action in emerging nations, utilisation of green bonds as an effective vehicle to tap into climate funds is anticipated to grow. Collective participation of regulators, policymakers, corporate and financial institutions is going to be crucial in pushing frontiers of green bonds further, unleashing new opportunities in addressing climate change.(Question in Prelims 2016)
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- Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition, a collective of the United States, United Kingdom and Norway governments, came up with a $1 billion fund.
- LEAF is supported by transnational corporations (TNCs) like Unilever plc, Amazon.com, Inc, Nestle, Airbnb, Inc as well as Emergent, a US-based non-profit.
- The world lost more than 10 million hectares of primary tropical forest cover last year, an area roughly the size of Switzerland.
- Ending tropical and subtropical forest loss by 2030 is a crucial part of meeting global climate, biodiversity and sustainable development goals. Protecting tropical forests offers one of the biggest opportunities for climate action in the coming decade.
- Tropical forests are massive carbon sinks and by investing in their protection, public and private players are likely to stock up on their carbon credits.
- The LEAF coalition initiative is a step towards concretising the aims and objectives of the Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism.
- REDD+ was created by the United Nations Framework Convention on Climate Change (UNFCCC). It monetised the value of carbon locked up in the tropical forests of most developing countries, thereby propelling these countries to help mitigate climate change.
- It is a unique initiative as it seeks to help developing countries in battling the double-edged sword of development versus ecological commitment.
- The initiative comes at a crucial time. The tropics have lost close to 12.2 million hectares (mha) of tree cover last year according to global estimates released by Global Forest Watch.
- Of this, a loss of 4.2 mha occurred within humid tropical primary forests alone. It should come as no surprise that most of these lost forests were located in the developing countries of Latin America, Africa and South Asia.
- Brazil has fared dismally on the parameter of ‘annual primary forest loss’ among all countries. It has lost 1.7 mha of primary forests that are rich storehouse of carbon. India’s estimated loss in 2020 stands at 20.8 kilo hectares.
- Between 2002-2020, Brazil’s total area of humid primary forest reduced by 7.7 per cent while India’s reduced by 3.4 per cent.
- Although the loss in India is not as drastic as in Brazil, its position is nevertheless precarious. For India, this loss is equivalent to 951 metric tonnes worth carbon dioxide emissions released in the atmosphere.
- It is important to draw comparisons between Brazil and India as both countries have adopted a rather lackadaisical attitude towards deforestation-induced climate change. The Brazilian government hardly did anything to control the massive fires that gutted the Amazon rainforest in 2019.
- It is mostly around May that forest fires peak in India. However, this year India, witnessed massive forest fires in early March in states like Odisha, Uttarakhand, Madhya Pradesh and Mizoram among others.
- The European Union’s Copernicus Atmospheric Monitoring Service claimed that 0.2 metric tonnes of carbon was emitted in the Uttarakhand forest fires.
- Implementation of the LEAF Coalition plan will help pump in fresh rigour among developing countries like India, that are reluctant to recognise the contributions of their forest dwelling populations in mitigating climate change.
- With the deadline for proposal submission fast approaching, India needs to act swiftly on a revised strategy.
- Although India has pledged to carry out its REDD+ commitments, it is impossible to do so without seeking knowledge from its forest dwelling population.
Context:-
At the recently concluded Leaders’ Summit on Climate in April 2021, Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition, a collective of the United States, United Kingdom and Norway governments, came up with a $1 billion fund plan that shall be offered to countries committed to arrest the decline of their tropical forests by 2030.
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]What is LEAF Coalition?
Why LEAF Coalition?
Brazil & India
According to the UN-REDD programme, after the energy sector, deforestation accounts for massive carbon emissions — close to 11 per cent — in the atmosphere. Rapid urbanisation and commercialisation of forest produce are the main causes behind rampant deforestation across tropical forests.
Tribes, Forests and Government
Disregarding climate change as a valid excuse for the fires, Indian government officials were quick to lay the blame for deforestation on activities of forest dwellers and even labelled them “mischievous elements” and “unwanted elements”.
Policy makers around the world have emphasised the role of indigenous tribes and local communities in checking deforestation. These communities depend on forests for their survival as well as livelihood. Hence, they understand the need to protect forests. However, by posing legitimate environmental concerns as obstacles to real development, governments of developing countries swiftly avoid protection of forests and rights of forest dwellers.
For instance, the Government of India has not been forthcoming in recognising the socio-economic, civil, political or even cultural rights of forest dwellers. According to data from the Union Ministry of Tribal Affairs in December, 2020 over 55 per cent of this population has still not been granted either individual or community ownership of their lands.
To make matters worse, the government has undertaken systematic and sustained measures to render the landmark Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act, 2006 ineffective in its implementation. The Act had sought to legitimise claims of forest dwellers on occupied forest land.
Various government decisions have seriously undermined the position of indigenous people within India. These include proposing amendments to the obsolete Indian Forest Act, 1927 that give forest officials the power to take away forest dwellers’ rights and to even use firearms with impunity.
There is also the Supreme Court’s order of February, 2019 directing state governments to evict illegal encroachers of forest land or millions of forest dwellers inhabiting forests since generations as a measure to conserve wildlife. Finally, there is the lack of data on novel coronavirus disease (COVID-19) deaths among the forest dwelling population;
Tardy administration, insufficient supervision, apathetic attitude and a lack of political intent defeat the cause of forest dwelling populations in India, thereby directly affecting efforts at arresting deforestation.
Way Forward
Tuntiak Katan, a global indigenous leader from Ecuador and general coordinator of the Global Alliance of Territorial Communities, aptly indicated the next steps at the Climate Summit:
“The first step is recognition of land rights. The second step is the recognition of the contributions of local communities and indigenous communities, meaning the contributions of indigenous peoples.We also need recognition of traditional knowledge practices in order to fight climate change”
Perhaps India can begin by taking the first step.