<p>A new bond is in town; the name’s green-bond (GB). On 16 February this year, Yes Bank launched the country’s first: a Rs 500-crore 10-year paper with a coupon of 8.85 per cent per annum. When the issue closed a week later, it had mopped up Rs 1,000 crore — the Rs 500-crore green-shoe option was fully subscribed. Insurance firms, pension and provident funds, foreign portfolio investors and mutual funds had lapped it up.<br><br>But first things first. What are GBs? They fall into a category called “theme bonds” — akin to what was issued to fund the railways in the 19th century, the war bonds (to kill one another!) in early 20th century, or the ones issued to finance highways in the 60s. Of course, all of this was largely in the western world — the idea being, you raise funds where investors know where exactly the proceeds will be deployed. It’s this that differentiates such issuances from the “general purpose” variety. And as the name suggests, GBs help finance green concerns; it’s caught fire of late.<br><br>“Demand for GBs is mostly from institutional investors, particularly those with a mandate to consider the environmental or social impact of their portfolios, and that’s where the big money is,” says Jaideep Iyer, group president, financial management , Yes Bank. Proceeds (from the issue) will fund 5,000 MW of renewable energy (RE) projects. Iyer concedes that it will take another 3-4 years for GBs to mature in India, but early signs hold promise.</p><p>On 25 March, we saw another first: a dollar-denominated GB issuance by the Export Import Bank of India (Exim Bank): a five-year $500-million offering priced at 147.50 basis points over US Treasuries (2.75 per annum). It was priced tighter than Exim’s $500 million (Regulation S bonds) issued a month earlier with a tenure of five-and-a-half years. The issue attracted bookings worth over $1.6 billion across 140 accounts with significant participation from green investors. “The goal was to get India global visibility in this huge market,” says Kaku Nakhate, president & country head, Bank of America-Merrill Lynch, one of the lead managers of Exim Bank’s offering.<br><br>Many others like state-run energy firms, which have been given a target by the Centre to invest more in RE , now look to raise funds through GBs, be it rupee or dollar-dominated.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/KAKU-NAKHATE--JAIDEEP-IYER-lrg.jpg" style="width: 588px; height: 399px; margin: 3px;"><br><br><strong>What’s The Driver?</strong><br>A report prepared by the Partnership to Advance Clean Energy-Deployment’s (PACE-D) technical assistance program, funded by the United States Agency for International Development, tells us how the market has shaped up. Globally, GBs have grown exponentially since 2013: fresh issuances over the past two years accounted for 80 per cent of the outstanding. As of October 2014, the size of the GB market stood at $54 billion, which included $32.5 billion of fresh issuances — that’s more than the cumulative issuance of GBs over the last eight years. It forecasts that issuances will top $100 billion by the end of 2015.<br><br>“The growth of GBs can be attributed to an overarching trend towards environment, social and governance (ESG) issues in the decision process for investments by institutional investors. Currently, $45 trillion of global assets under management incorporate ESG issues,” says Anirban Chatterjee, manager, Second Party Audit and Sustainability Services, Bureau Veritas.<br><br>This trend presents opportunities for Indian entities to participate in GBs at this nascent stage with ticket sizes in the range of $150 million to $250 million. It will help them capture the attention of investors in an uncluttered market, and ensure better terms due to the low-risk perception of international investors for prospective similar issuances.<br><br><strong>It’s Just Begun</strong><br>With an aggressive target of 165 GW of installed RE by 2022, the Centre will require large investments. As on date, project financing sources — be it commercial banks, non-banking finance companies, multi-lateral and bi-lateral lines of credit (to financial institutions) and domestic bond issuances — are inadequate. It holds true for not just green causes, but about every other big, long-gestation project.<br><br>And you need to explore options beyond traditional sources of funds. GBs will enable us to attract capital and consequently, scale up RE investments and meet the target set under the National Action Plan on Climate Change. Along the way, analysts feel large-scale foreign capital inflows will boost the forex kitty and help offset the energy (read oil) import bill.<br><br>Climate Bond Initiative (CBI), an international not-for-profit investor that focuses on tapping the potential $100-billion GB mark has set standards to be met by issuers. It has appointed seven global certified verifiers: Bureau Veritas, KPMG, EY, DNV-GL, Ethifinance, Oekem Research, and TRUCOST. Their job is to verify RE projects which meet environmental and financial guidelines set by CBI and issue a Climate Bond Certificate.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/costly-propositon-lrg.jpg" style="width: 640px; height: 463px;"><br><br>To get funded, projects have to meet criteria in five areas: environmental protection, contribution to local development and the well-being of local communities, fair and ethical relationships with suppliers and sub-contractors, human resources management, and good corporate governance. “These (projects) need to have positive longer-term societal impact. They have to be sustainable and should not turn out to be negative for the society and the environment at any point, otherwise the projects can be withdrawn or rejected,” says Das.<br><br>Adds Santhosh Jayaram, director, Climate Change and Sustainability Practice, KPMG: “Investors need to be assured that GB proceeds are being allocated to qualifying projects appropriately, and are subsequently producing the intended positive impacts.”<br><br>The Centre has floated proposals to private, state-run financial institutions and certified verifiers to become part of the accredited National Implementing Entity (NIE), which is a single entity to govern the functioning of GBs. The Department of Public Enterprises (DPE) has approached PSUs to raise low-cost long-term funds to quadruple its RE production and make it viable for debt-laden distribution companies to buy clean power.<br><br><strong>Challenges Galore</strong><br>In our context, GBs entail high hedging costs due to poor sovereign ratings (currently at ‘BBB’) and shorter tenures (they are concentrated in the 3-10 years bucket with only some at or over 15 years). While capital demand from the sector — in general — has been low in the past 2 -3 years due to policy paralysis and the economic slowdown, the need to diversify capital pools to meet fresh capacity targets remain intact.<br><br>“In order to meet the needed RE, the financial markets will need to bring in instruments and mechanisms which meet the specific requirements of the sector such as long tenure, high infusion of funds, and active participation of a variety of investors such as pension funds, sovereign wealth funds, insurance companies (which are estimated to manage over $80 trillion),” says Chatterjee.<br><br>“It is tough to educate foreign investors about the viability to invest in India in GBs, as the standards and norms are still evolving,” says Nakhate. She feels that the fact that the domestic debt market is yet to offer depth and flexibility will be a key limitation as demand (for debt finance) is expected to rise in the near future, and that instruments that allow financial institutions and independent power producers to access capital at suitable terms are critical.<br><br>“In India, GB is not yet huge, as there are only two so far. But there is opportunity, given the financing needs. We expect to see 5-10 more GBs from India before the end of the year,” says Sean Kidney, CEO, Climate Bond Initiative (CBI).<br><br>GB is one bond that’s going to shake and stir up RE! <br><br>monica@businessworld.in <br>@monicabehura<br><br>(This story was published in BW | Businessworld Issue Dated 13-07-2015)</p>