What are green bonds

A bond is a debt instrument with which an entity raises money from investors. The bond
issuer gets capital while the investors receive fixed income in the form of interest. When the
bond matures, the money is repaid.
A green bond is very similar. The only difference is that the issuer of a green bond publicly
states that capital is being raised to fund green projects, which typically include those
relating to renewable energy, emission reductions and so on. There is no standard definition
of green bonds as of now.
Indian firms like Indian Renewable Energy Development Agency Ltd and Greenko have in
the past issued bonds that have been used for financing renewable energy, however, without
the tag of green bonds.
Green bonds are issued by multilateral agencies such as the World Bank, corporations,
government agencies and municipalities. Institutional investors and pension funds also have
appetite for such bonds. For instance, investment funds BlackRock and PIMCO have specific
mandates from their investors to invest only in bonds which fund green projects. The issuer
provides periodic reports about the project.
Why are they in the news
In March, the Exim Bank of India issued a five-year $500 million green bond, which is
Indias first dollar-denominated green bond. The issue was subscribed nearly 3.2 times. The
bank has said it would use the net proceeds to fund eligible green projects in countries
including Bangladesh and Sri Lanka. Earlier, in February, Yes Bank raised Rs 1,000 crore via
a 10-year bond, which was oversubscribed twice.
Why are green bonds important for India
India has embarked on an ambitious target of building 175 gigawatt of renewable energy
capacity by 2022, from just over 30 gigawatt now. This requires a massive $200 billion in
funding. This isnt easy. As reports suggest, higher interest rates and unattractive terms under
which debt is available in India raise the cost of renewable energy by 24-32 per cent

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compared to the U.S. and Europe. India has big goals in terms of renewable energy
installations, but a big hurdle has been financing and the cost of financing, says Raj Prabhu,
CEO and Co-founder of Mercom Capital Group, a global clean energy research and
communications firm.
Budget allocations have been insufficient. Renewable energy is still part of the larger
power/infrastructure funding basket in most banks, and with most financing going towards
coal power projects, there is very little funding left for renewable energy. Currently, options
for raising funds and investing in the renewable energy story in the public markets in India
is very limited, he says. Thats why green bonds seem like a good option.

Who Is Involved in the Green Bond Market?

Green Bond issuers Driven by supranationals EIB, IBRD, and IFC in the early days, late
2013 and 2014 saw progression with new international agencies entering the field such as
KFW, FMO, and EDC. The market expanded to include corporates such as EDF, GDF Suez,
Unilever, and Unibail-Rodamco. U.S. municipals are the most recent participants, including
Massachusetts, Connecticut, California, as well as DC Water. Universities followed suit led
by MIT and University of Cincinnati.
Green Bond investors Investors range from green dedicated funds and retail, to asset
managers, banks, corporations, pensions and insurance companies. Investors are not exposed
to the risk of specific projects the repayment of the bond is subject to the credit risk of the
issuer; however, other forms of Green Bonds are emerging including asset backs and covered
bonds, where investors can take exposures to projects.

Still, why are green bonds an attractive option

Shantanu Jaiswal, analyst at Bloomberg New Energy Finance, says, Green bonds typically
carry a lower interest rate than the loans offered by the commercial banks. Hence, when
compared to other forms of debt, green bonds offer better returns for an independent power
producers, Samuel Joseph, Chief General Manager, Treasury and Accounts Group, Exim

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Bank of India, says as these bonds are meant for specific investors looking to invest in
renewable energy projects, pricing could be attractive.
The banks green bond was priced at 147.50 basis points over US Treasuries (whereas,
usually, bonds are priced at treasuries plus 150 basis points) at a fixed coupon of 2.75 per
cent per annum.
Why should an investor get excited with lower interest?
Because, it inherently carries lower risk than other bonds. According to a KPMG report, in
case of a green bond, proceeds are raised for specific green projects, but repayment is tied to
the issuer, not the success of the projects. This means the risk of the project not performing
stays with the issuer rather than investor.
How well have green bonds performed globally
According to Bloomberg New Energy Finance, a record $38.8 billion in green bonds were
issued in 2014, 2.6 times the $15 billion issued in 2013. Most issuances of international
green bonds have been oversubscribed suggesting a strong appetite for them especially when
done by a strong issuer like a large corporate or a government agency, the report says.
Who have been the issuers of these bonds
In the period between 2007 and 2012, supranational organisations such as the European
Investment Bank and the World Bank, as also governments, accounted for most of the green
bond issue. Since then, corporate interest has risen sharply. In 2014, bonds issued by
corporations in the energy and utilities, consumer goods, and real estate sectors accounted for
a third of the market, according to KPMG.
What are the risks and challenges
Globally, there have been serious debates about whether the projects targeted by green bond
issuers are green enough. There have been controversies too. Reuters a few months back
reported how activists were claiming that the proceeds of the French utility GDF Suezs $3.4
billion green bond issue were being used to fund a dam project that hurts the Amazon
rainforest in Brazil.

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There could also be a currency risk.

From an Indian perspective, a challenge of making investors subscribe could be the tenor and
rating of green bonds, reckons Bloombergs Jaiswal. The downside is that green bonds in
India have a shorter tenor period of about 10 years in India whereas a typical loan would be
for minimum 13 years. This is less when compared to many international issuances. Also, he
says, Many target buyers of Indian green bonds may not invest in any bonds that are rated
lower than the AAA-.
What Projects Are Green Enough?
There is no market standard for the definition of green. The Green Bond Principles (GBP)
were developed with guidance from issuers, investors and environmental groups to serve as
voluntary guidelines covering the recommended process for the development and issuance of
Green Bonds. The transparency and disclosure recommended by the GBP are intended to
provide the information needed for investors to make their own decisions about an issuers
stated eligible project categories. J.P. Morgan was one of the four banks that co-authored the
GBP and currently serves on the Executive Committee. A consortium of over 100 issuers,
investors, opinion providers, and banks are GBP members and observers. The Climate Bonds
Initiative has been diligently working in a consultative manner, for the past three years on
establishing a market standard for the definition of green.
Investor transparency is essential to the growth of the Green Bond market. Issuers are
encouraged to have their green projects assessed by external opinion providers who are
climate expert consultants. Cicero, DNV-GL, Oekom Research, Sustainalytics, and Vigeo are
active opinion providers. Issuers are also encouraged make public, annual reports on the
green projects they were funded by the Green Bond proceeds.

Green Bond Market Growth

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Source: The Climate Bonds Initiative, J.P. Morgan as of February 5, 2015. Includes use of

proceeds Green Bonds

and the Toyota ABS

Corporate growth Propelled by EDFs issuance in November 2013, corporate

Green Bond issuance has accelerated. 2014 corporate issuance was about $15 billion, over 4x
that of 2013. Utilities, financials, real estate, consumer product, and industrial sector
corporates have all issued Green Bonds.
Municipal growth Municipal Green Bond issuance grew 13x in 2014, with over $4

billion in supply. MIT, as the first higher education issuer, issued Green Bonds to refinance
debt issued to build LEED buildings. NYS Environmental Facilities Corporation financed
128 drinking water and infrastructure projects across New York State and was the first U.S.
municipal revenue Green Bond. DC Water is the first Green Century (100 year maturity)
Bond.

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TYPES OF GREEN BONDS

Green Bonds are instruments in which the proceeds will be exclusively applied (either by
specifying Use of Proceeds, Direct Project Exposure, or Securitization) towards new and
existing Green Projects defined here as projects and activities that promote climate or other
environmental sustainability purposes. There are currently four types of Green Bonds
(additional types may emerge as the market develops and these will be incorporated in annual
GBP updates):
Green Use of Proceeds Bond: a standard recourse-to-the-issuer debt obligation for which
the proceeds shall be moved to a sub-portfolio or otherwise tracked by the issuer and attested
to by a formal internal process that will be linked to the issuers lending and investment
operations for projects. Pending such investment, it is recommended that the issuer make
known to investors the intended types of eligible investments for the balance of unallocated
proceeds.
Green Use of Proceeds Revenue Bond: a non-recourse-to-the-issuer debt obligation in
which the credit exposure in the bond is to the pledged cash flows of the revenue streams,
fees, taxes etc., and the Use of Proceeds of the bond goes to related or unrelated Green
Project(s). The proceeds shall be moved to a sub-portfolio or otherwise tracked by the issuer
and attested to by a formal internal process that will be linked to the issuers lending and
investment operations for projects. Pending such investment, it is recommended that the
issuer make known to investors the intended types of eligible investments for the balance of
unallocated proceeds.
Green Project Bond: a project bond for a single or multiple Green Project(s) for which the
investor has direct exposure to the risk of the project(s) with or without potential recourse to
the issuer.
Green Securitized Bond: a bond collateralized by one or more specific projects, including
but not limited to covered bonds, ABS, and other structures. The first source of repayment is
generally the cash flows of the assets. This type of bond covers, for example, asset-backed
securitizations of rooftop solar PV and/or energy efficiency assets.

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Green Bond Principles, 2015 Voluntary Process Guidelines for Issuing Green Bonds
March 27, 2015Green Bond Principles, 2015 Voluntary Process Guidelines for Issuing
Green Bonds March 27, 2015
GREEN BOND PRINCIPLES The GBP recommend concrete process and disclosure for
issuers which investors, banks, investment banks, underwriters, placement agents and others
may use to understand the characteristics of any given Green Bond. The GBP have four
components: 1) Use of Proceeds 2) Process for Project Evaluation and Selection 3)
Management of Proceeds 4) Reporting

1. Use of Proceeds The cornerstone of a Green Bond is the utilization of the proceeds of the
bond. For a Green Use of Proceeds Bond or a Green Use of Proceeds Revenue Bond, the
issuer should declare the eligible Green Project categories (including types of investments
made indirectly through financial intermediaries) in the Use of Proceeds section of the legal
documentation for the security. The GBP recommend that all designated Green Project
categories provide clear environmental benefits that can be described and, where feasible,
quantified and/or assessed. There are several categories and sets of criteria defining eligible
Green Projects already in existence in the market. Issuers and other stakeholders can refer to
examples in the Appendix. The GBP recognize several broad categories of potential eligible
Green Projects for the Use of Proceeds including but not limited to: Renewable energy
Energy efficiency (including efficient buildings) Sustainable waste management
Sustainable land use (including sustainable forestry and agriculture) Biodiversity
conservation Clean transportation Clean water and/or drinking water
2. Process for Project Evaluation and Selection The issuer of a Green Bond should outline
the investment decision-making process it follows to determine the eligibility of an individual
investment using Green Bond proceeds. Where applicable, the issuer should, as a first step,
review the investments overall environmental profile. In all cases, the issuer should establish
a well-defined process for determining how the investments fit within the eligible Green
Project categories identified in the Use of Proceeds disclosure. A process of review should
determine and document an investments eligibility within the issuers stated eligible Green
Project categories. If possible, issuers should work to establish impact objectives from the
projects selected. To the extent feasible, issuers should consider direct and indirect impacts of

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Green Projects, such as cases where investments lock-in a current level of emissions into the
future. Multilateral and bilateral agencies and other International Finance Institutions have
established processes to ensure that environmental criteria are considered for each project to
which they allocate funds, independent of whether they qualify for use of Green Bond
proceeds. These reviews are carried out with resident teams of environmental experts. The
GBP recommend all issuers, where applicable, engage in similar environmental reviews of
the projects they are financing. In addition to the Green Bond process, criteria and assurances
that an issuer provides, many Green Bond investors may also take into consideration an
issuer's overall environmental and social and governance framework.

3. Management of Proceeds The net proceeds of Green Bonds should be moved to a subportfolio or otherwise tracked by the issuer and attested to by a formal internal process that
will be linked to the issuers lending and investment operations for projects. So long as the
Green Bonds are outstanding, the balance of the tracked proceeds should be periodically
reduced by amounts matching investments made during that period. Pending such
investments, it is recommended that the issuer make known to investors the intended types of
eligible instruments for the balance of unallocated proceeds. The management process to be
followed by the issuer for tracking the proceeds should be clearly and publicly disclosed. The
environmental integrity of Green Bond instruments will be enhanced if an external auditor, or
other third party, verifies the internal tracking method for the flow of funds from the Green
Bond proceeds. Depending on issuers and investors expectations, outside review of the
internal tracking method may or may not be necessary.

4. Reporting In addition to reporting on the Use of Proceeds and the eligible investments for
unallocated proceeds, issuers should report at least annually, if not semi-annually, via
newsletters, website updates or filed financial reports on the specific investments made from
the Green Bond proceeds, detailing wherever possible the specific project and the dollars
invested in the project. The GBP recommend the use of quantitative and/or qualitative
performance indicators which measure, where feasible, the impact of the specific investments
(e.g. reductions in greenhouse gas emissions, number of people provided with access to clean
power or clean water, or avoided vehicle miles travelled, etc.). While there is variability in
impact measurement systems, much progress towards standardization has been made in the

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past several years. Issuers are recommended to familiarize themselves with impact reporting
standards and, where feasible, to report on the positive environmental impact of the
investments funded by Green Bond proceeds. IV. ASSURANCE Attention will be paid to the
accuracy and integrity of sustainability information and data whose disclosure is
recommended by the GBP and which will be reported by issuers to stakeholders and used for
strategic decision making by investors. There are a variety of ways for issuers to obtain
outside input to the formulation of their Green Bond offerings such that they address the
issues raised by the GBP. There are also several levels of independent assurance that can be
provided to the market. Such guidance and assurance might include, in order of increasing
rigor: (i) Second party consultation: for example, an issuer (first party) can hire an expert
consultant (second party) with climate expertise to help in the establishment of a Green
Bonds eligible Green Project categories. The issuer may choose to keep the
recommendations of the consultant private. (ii) Publicly available reviews and audits: if an
expert consultant or auditor and an issuer so choose, a consultants recommendations or an
auditors evaluation may be put in the public domain by the issuer. (iii) Third party,
independent verification/certification: at the moment, at least one or more standards intended
for use by accredited third parties to certify Green Bonds are in development. The GBP are
supportive of certification of Green Bonds against fully developed and vetted standards. It is
also the intention of the GBP to allow for 6 third party evaluation/audit of conformance with
the guidelines recommended herein.
INTRODUCTION Green Bonds raise funds for new and existing eligible projects with
environmental benefits. The Green Bond Principles (GBP) are voluntary process guidelines
intended for broad use by the market that recommend transparency and disclosure, and
promote integrity in the development of the Green Bond market. They are intended to provide
the informational basis for the market to increase capital allocation to environmentally
beneficial purposes without any single authority or gate keeper. The scope of the GBP has
been refreshed in this second edition. Working with the support of the International Capital
Market Association (ICMA) as Secretary to the GBP, the GBP Executive Committee which
brings together a representative group of issuers, investors and intermediaries in the Green
Bond market, has sought to reflect the evolution of the Green Bond market and to identify
best practice. This work benefited from extensive coordination and dialogue with market
participants, including a consultation process with GBP members and observers during the
summer of 2014. Green Bond issuance grew substantially during 2014, confirming the

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validity of the approach and raising expectations as to the benefits of its further expansion.
Initially driven largely by Multilateral Development Banks (MDBs), issuance has extended to
new issuer categories such as other public institutions, utilities, corporates, and financial
institutions. This process benefits from the growing involvement of a wider universe of
investors that have different levels of capacity to evaluate environmental projects. To date
these investors have especially focused on those Green Bonds that have allowed them to gain
transparent access to a diversity of underlying environmental projects while providing them
with the simplicity of credit exposure to a clearly identified issuer with an established risk
profile. The second edition of the GBP represents an incremental evolution from the previous
standard and aims to provide further clarity on what can be expected from issuers. Amongst
others, a comprehensive high level definition of Green Bonds has been included and the
recognized broad categories of eligible projects have been updated. A particular effort has
also been made to define and clarify assurance. The GBP continue to reflect the diversity of
opinion on the definition of Green Projects. Other modifications have been made throughout
to improve readability and confirm intent.
The GBP recommend the use of qualitative performance indicators and, where feasible,
quantitative performance measures of the expected environmental sustainability impact of the
specific investments (e.g. reductions in greenhouse gas emissions, number of people provided
with access to clean power, reduction in number of cars required, etc.). Where confidentiality
agreements or competition issues limit the amount of detail that can be made available,
information can be presented in generic terms. The GBP acknowledge that there are currently
no established standards for impact reporting on Green Projects, and welcome and encourage
initiatives, including those by leading Green Bond issuers, to help establish a model for
impact reporting that others can adopt and/or adapt to their needs. Until more harmonization
is achieved, transparency is of particular value, including disclosure of methodologies and
key underlying assumptions. ASSURANCE It is recommended that issuers use external
assurance to confirm their alignment with the key features of Green Bonds as defined above.
There are a variety of ways for issuers to obtain outside input to the formulation of their
Green Bond process and there are several levels and types of independent assurance that can
be provided to the market. Such guidance and assurance might include: 5 (i) Second party
reviews and consultation: for example, an issuer can seek advice from consultants and/or
institutions (second party) with recognized expertise in environmental sustainability to
review or to help in the establishment of its process for project evaluation and selection

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including project categories eligible for Green Bond financing. The reviews and reports of the
second party are private, and may be made publicly available only at the discretion of the
issuer. (ii) Audits: Issuers are encouraged to have independently verified or audited certain
aspects of their Green Bond process, such as the internal tracking method and the allocation
of funds from proceeds. The verification can be provided by qualified third parties, or by
internal and/or external auditors. These independent reports and audits may be put in the
public domain at the discretion of the issuer. (iii) Third-party certifications: Second-party
standards intended for use by qualified third parties to certify Green Bonds are in use or in
development. The GBP are supportive of the development of and use of such standards for
the certification of Green Bonds as they are defined above. DISCLAIMER The Green Bond
Principles are voluntary process guidelines that neither constitute an offer to purchase or sell
securities nor constitute specific advice of whatever form (tax, legal, environmental,
accounting or regulatory) in respect of Green Bonds or any other securities. The Green Bond
Principles do not create any rights in, or liability to, any person, public or private. Issuers
adopt and implement the Green Bond Principles voluntarily and independently, without
reliance on or recourse to the Green Bond Principles, and are solely responsible for the
decision to issue Green Bonds. Underwriters of Green Bonds are not responsible if issuers do
not comply with their commitments to Green Bonds and the use of the resulting net proceeds.
If there is a conflict between any applicable laws, statutes and regulations and the guidelines
set forth in the Green Bond Principles, the relevant local laws, statutes and regulations shall
prevail. 6 APPENDIX I There are currently four types of Green Bonds (additional types may
emerge as the market develops and these will be incorporated in annual GBP updates):
Green Use of Proceeds Bond: a standard recourse-to-the-issuer debt obligation for which the
proceeds shall be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by
the issuer and attested to by a formal internal process that will be linked to the issuers
lending and investment operations for eligible projects. Pending such investment or
disbursement, it is recommended that the issuer make known to investors the intended types
of eligible investments for the balance of unallocated proceeds. Green Use of Proceeds
Revenue Bond: a non-recourse-to-the-issuer debt obligation in which the credit exposure in
the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and the use of
proceeds of the bond goes to related or unrelated Green Project(s). The proceeds shall be
credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer and
attested to by a formal internal process that will be linked to the issuers lending and

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investment operations for eligible projects. Pending such investment or disbursement, it is

recommended that the issuer make known to investors the intended types of eligible
investments for the balance of unallocated proceeds. Green Project Bond: a project bond for
a single or multiple Green Project(s) for which the investor has direct exposure to the risk of
the project(s) with or without potential recourse to the issuer. Green Securitized Bond: a
bond collateralized by one or more specific projects, including but not limited to covered
bonds, ABS, and other structures. The first source of repayment is generally the cash flows of
the assets. This type of bond covers, for example, asset-backed securitizations of rooftop
solar PV and/or energy efficiency assets.

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Hurdles to Going Green

The first risk with green bonds is a lack of liquidity. This is still a small market, and getting
in and out of positions will not be easy. If youre looking for a liquid investment, then you
should consider avoiding green bonds. This is likely to change in the future since demand for
new issuances is high and the market should continue to grow, but for right now, green bonds
should be left for those who dont mind holding to maturity.
Another risk is the lack of a clear definition for a green bond investors might not know
exactly where their money is going, meaning that it could potentially be used for the wrong
reasons. For example, The EDF Group, which provides home and business energy in the
U.K., operates nuclear power plants in France and Britain and recently issued a 1.4 billion
green bond. But is investing in nuclear power really green? It's debatable. Carbon emissions
might be low, but nuclear waste has to pollute the environment in some way.
Some coal-fired power plants also believe that implementing technology that reduces carbon
emissions is considered green, but nothing about coal is green.
If youre looking at this purely from an investment standpoint to profit from the growing
green bond market and youre not concerned about moral vs. immoral, then you still might
not want to overlook the above risks. That's because if investors begin to realize that their
money is being used in ways they did not intend or understand, then the green bond market
will reverse course with and eventually die. The most likely scenario is that this does not
happen, but its still a faint possibility.
Other risks for green bonds include low yields (which isn't necessarily a risk), mispricing
(which can also be a benefit), a lack of sufficient complex research available to make an
educated investment decision, and the existence of some green bond issuers with
unscrupulous reputations for money laundering and LIBOR fixing (so make sure you do your
research prior to investing).
A final risk to consider: the plunge in oil prices. When oil prices are high, there is
heightenedinterest in alternative energy. As much as everyone will outwardly state that their
top priority is the environment, the numbers always prove that the No. 1 priority is money.

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For example, when oil prices go down, sales for SUVs rise. People buy SUVs because the
price of gas isnt as high as in the past.
When oil prices are low, which they are at the moment and are likely to remain for several
years, the demand for alternative energy declines. Another example: When oil prices are low,
people are less likely to switch to solar energy for their homes. The good news is that the
support for green energy around the world is so large that it should offset the lower price for
oil.

Budding Opportunities

Going green is one of the most popular trends in the economy right now, and that trend is
going to continue. Governments around the worldincluding the U.S. governmentare
highly likely to present favorable regulation, which will help many green projects.
Governments are also going to offer tax advantages for green investors in order to help drive
the market. As of right now, investing in green bonds is similar to investing in U.S.
Treasuries. You will not see significant returns, but you will find relative safety.
As stated above, demand for new issues is high, which will lead to a virtuous cycle. Green
bonds are gaining popularity in the U.S. For example, in May 2013, Tesla Motors, Inc.
(TSLA) issued a $600 million convertible green bond. In March 2014, Toyota Motor Corp
(TM) issued an asset-backed security to finance hybrid vehicle loans.
Green bond growth is evident in the U.S., but their popularity of began with power
companies in France. This is more of a global story than a domestic one. Here are
some supranationalissuers of green bonds:

European Investment Bank

African Development Bank

European Bank for Reconstruction and Development

World Bank

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On top of that, the World Economic Forum suggests that $700 billion per year needs to be
invested in clean energy, transportation, and forestry. The International Energy Agency
recommends $1 trillion per year in the low carbon economy.
Non-supranational issuers also exist, including the Vornado Realty Trust (VNO), which has
issued a floating-rate green bond.
Other corporate green bond issuances include:

Vasakronan (a Swedish real estate company)

Unibail-Rodamco (commercial property in Europe)

Unilever plc (UL)

SCA Svenska Cellulosa Aktiebolaget (Europe's largest private forest owner; it has
ambitions to pursue profitable and responsible forestry activities)

Skanska (a global project development and construction group)

You can also invest in green bonds directly via Calvert Green Bond A (CGAFX). At the time
of this writing Aug. 7, 2015 CGAFX has depreciated 0.46% over the past year but
yields 1.41%. Net Assets are $54.36 million, and the expense ratio is 0.88% (that's high).
Theminimum investment is $2,000.

Investor Demand and Diversification

Investors are increasingly demanding socially responsible investment (SRI) opportunities and
have expressed a strong appetite for green bonds by repeatedly oversubscribing issuances.
While retail investors demand sustainable investments from their brokers and fund managers,
institutional investors are using green bonds to address ESG (Environment, Social,
Governance) mandates, something that, before Green Bonds, had been a struggle to address

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with fixed income tools. As a result, green bond issuances have attracted new investors and
new types of investors, providing a potential market for future issuances.

Enabling Projects at a Lower Cost of Capital

Green bonds are an excellent way to secure large amounts of capital to support environmental
investments that may not otherwise be available, or that may be uneconomic using more
expensive capital. Green bonds are well suited for large-scale sustainability projects such as
wind and solar development, which often require capital investment ahead of revenues, and
which generate modest revenue over a longer investment horizon.

Leadership

For the foreseeable future, green bond issuers are leaders in developing this space. They can
encourage other municipalities to participate and establish a financially innovative reputation.
Early adopters will pave the way for the rest of the nation in financing environmental
projects. Government leaders may also participate in working groups and coalitions, which
are shaping the market, developing standards, and ensuring lasting success.

Press Coverage & Brand Value

Green Bonds provide governments with a chance to brand themselves as forward thinking,
innovative, and sustainable. The press continues to cover green bond issues favorably. The
State of Massachusetts received international coverage by top financial news reporters,
resulting in television coverage and interview requests for the treasurer.

Green Bonds over other options

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Green Bonds offer an exciting opportunity for both investors and issuers to encourage
sustainable growth while leading the investment community. Green bonds provide several
advantages over other financing options.

They provide institutional investors with a means of accessing sustainable

investments in the fixed income market in a familiar, low-risk vehicle.

Issuing this emerging security type sends a strong, pro-active message to stakeholders
while attracting a new investor base.

Green Bonds also provide municipalities with an ideal opportunity to develop PublicPrivate-Partnerships (PPPs) to accelerate the advancement of new technologies and
energy efficiency. One example of this is the Morris Model, where Morris County
issued low cost bonds for solar projects on government buildings, passing along the
low cost to a private developer.

Investor Expectations for the Green Bond Market

Recent success in the development of the Green Bond market has elicited calls from the
investment community to develop and adhere to clarity in standards and procedures. This
document is intended to provide guidance to issuers of green bonds. The Ceres Investor
Network on Climate Risk (INCR) has convened a working group of existing and potential
green bond buyers to outline a Statement of Investor Expectations for bonds labeled green.
There is consensus among this group that:
A green bond is a fixed income instrument whose proceeds finance projects that generate
significant identifiable climate or other environmental benefits and whose use is predefined
and made transparent to the investor
Bonds that finance credible green projects while remaining consistent with fiduciary
considerations enable investors to incorporate environmental objectives into their investment
strategies and, as such, are likely to attract increased investor interest

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 The Green Bond Principles (GBP) set forth appropriate common criteria concerning
eligibility, disclosure, transparency and impact reporting for green bonds
We support adherence to the GBP by issuers and underwriters. Additionally, we address four
key issues that can benefit from further definition and structure:
1. Eligibility: General Criteria for Green Projects
2. Initial Disclosures and Intended Use of Proceeds
3. Reporting on Use of Proceeds and Project Impacts / Benefits
4. Independent Assurance

While we acknowledge that implementing these guidelines may have additional costs to
issuers, we urge issuers to follow them to the extent feasible.
1. Eligibility: General Criteria for Green Projects We expect that green bonds will
support projects that fit within the eligible categories listed by the GBP and that these
projects will have material, positive net benefits for the climate or the environment.
Where proceeds are used to reduce greenhouse gas (GHG) emissions we encourage issuers to
compare their targeted impacts to publicly available standards or benchmarks. These are
offered by various organizations including green bond issuers such as the European
Investment Bank, the International Finance Corporation, and the World Bank, as well as
nonprofit groups such as the Climate Bonds Initiative and the World Resources Institute.
Reference to and consistency with such independent standards will enhance the credibility of
a green bond issue.
Projects that are not primarily climate-focused should 1) significantly contribute to
conservation and/or sustainable and efficient management of natural resources, 2) reduce
waste or pollution, or 3) otherwise enhance environmental quality and contribute to
sustainable living. Reference to recognized independent standards is desirable.
Certain projects that fall within the GBP categories may benefit the environment in important
ways but also degrade it in others. Examples include energy efficient shale and oil sands
operations; large-scale hydro, nuclear power generation and other environmentally disruptive

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electric power projects; seawater desalination; and GHG reductions from coal-fired power
plants. As investors, we will exercise additional diligence when evaluating bond offerings for
environmentally marginal projects that are labelled green.
We welcome the issuance of green bonds by all entities. However, specific projects that help
perpetuate fossil-fuel utilization and emissions come with a greater burden of disclosure of
exceptional climate benefits and may be better served by issuing conventional bonds rather
than by bonds designated as green. This will minimize greenwash concerns and reputation
risk to issuers and investors.
2. Initial Disclosures and Intended Use of Proceeds
In order to classify a green bond as such, issuers need to provide investors with specific
information prior to issuance. Chief among these disclosures are the categories of projects to
which issuers intend to allocate the funds; the framework for deciding which projects should
receive green bond funding; the criteria for assessing environmental benefits; and the
environmental impacts issuers expect their projects to generate.
Designated green projects should provide clear environmental benefits that can be
described, assessed and, when possible, quantified. This can take the form of supporting
environmental studies, projections of expected impacts, internal research and third party
assessments. For green securitized bonds, as long as the proceeds are dedicated to promote
climate or other environmentally sustainable purposes, actual collateral need not qualify as
green.
Issuers should provide information to investors about the percentage of bond proceeds being
used for new project funding versus refinancing, especially to projects that were already
financed prior to the start of the issuers green bond program.
Issuers should describe the management process for tracking proceeds from the green bond
offering. This can take a variety of forms, such as a sub-portfolio, a separate bank account or
sub-account. Issuers will outline how proceeds will be transparently tracked and how this will
be communicated to investors, at least annually. Audits verifying such internal tracking
methods and allocation of funds from proceeds are encouraged.
Green bond proceeds should be applied or allocated to eligible projects within a reasonable
period of time after issuance, appropriate to the maturity of the bond.

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 Issuers should declare their plan for reporting project impacts and how to disseminate this
information as further outlined below.
We recommend separate presentation of the information described above that allows
investors to compare this information between issuers.

3. Reporting on Use of Proceeds and Project Impacts/Benefits

We expect issuers to provide annual updates on the use of green bond proceeds for eligible
projects and reports of the estimated impact or benefits of projects supported by the green
bond financing.
The use of proceeds can be reported on a project-by-project or aggregate basis, and can be
provided together with the issuers impact report.
Issuers should communicate to investors, at least annually, information concerning the
beneficial climate, environmental and other impacts of their projects.
Impact reports should be publicly available and include expected results according to
estimates developed when projects are in the design, construction and/or implementation
phase. To make such reporting easy for investors to understand, a simplified set of indicators
concerning impact is recommended. Where available, references to more detailed supporting
documentation should be noted and made available if requested.
To remedy the current absence of standards concerning impact reporting, we welcome and
encourage initiatives, including those by early green bond issuers, to help establish models
for impact reporting that others can adopt and/or adapt to their needs.

4. Independent Assurance
Given the complexity of assuring the use of proceeds for green bonds, additional levels of
oversight concerning proceeds tracking and selection of eligible green projects are helpful to
investors.
To address this need, several credible auditors and climate and environmental, social,
governance (ESG) institutions have been participating as helpful independent assurers in the

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Green Bond market. We encourage support from financial auditors in tracking bond proceeds
to stated eligible project categories and opinions from climate and ESG experts concerning
selection of green projects and their expected environmental benefits. This additional level of
scrutiny can provide comfort to bond investors that additional outside due diligence has been
conducted to the extent feasible. This approach should help promote the integrity of this
growing market.
Second party outside opinions on an issuers green bond program give investors further
confidence that:
1. The criteria for selecting projects having climate and/or other environmental benefits
are in line with sound climate and environmental analysis and consistent with relevant
standards for eligible projects that are referenced
2. The selected eligible projects fall within the categories of investments commonly
recognized to address the targeted environmental problem (e.g., GHG emissions,
reduction in energy use, water pollution) based on information available from
recognized sources, such as academic institutions, international organizations or other
entities having environmental and climate expertise
3. Issuers have an appropriate governance structure with guidelines and systems in place
to support the selection, monitoring and assessment of the projects
4. Issuers have the capacity to assess or measure and report on the impact or agree to
outsource the impact assessment and reporting to an appropriate third party
When issuers rely on internal expertise and/or opinions of retained consultants, additional
disclosure about the project selection criteria, use of proceeds and anticipated impacts are
recommended.

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Green Bond in India

Need for Green Bonds Infrastructure financing in India has traditionally been supported by
the institutions such as banks, NBFCs and Financial Institutions. However, given the huge
investment requirements in infrastructure space, it is widely accepted that current project
financing sources may not be sufficient for capacity addition. Thus, there is a need to
introduce new means of financing and innovative financial instruments that can leverage a
wider investor base such as pension funds, sovereign wealth funds, insurance companies, etc.
that can invest in the infrastructure sector. Corporate bond markets have long been considered
towards providing this much required alternate source of financing.
Indias Intended Nationally Determined Contribution (INDC) document1 puts forth the stated
targets for India's contribution towards climate improvement and following a low carbon path
to progress. The document also impresses upon the need of financing needs for achieving the
stated goals, where a preliminary estimate suggests that at least USD 2.5 trillion (at 2014-15
prices) will be required for meeting India's climate change actions between now and 2030. In
this regard the document talks about the introduction of Tax Free Infrastructure Bonds of INR
50 billion (USD 794 million) for funding of renewable energy projects during the year 201516.
Further, India has embarked upon an ambitious target of building 175 gigawatt of renewable
energy capacity by 2022 and this requires a massive estimated funding of USD 200 billion.

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Thus, the financing needs of renewable energy space require new channels to be explored
which can provide not only the requisite financing, but may also help in reducing the cost of
the capital. Green bonds as a part of corporate bonds space may be one of the answer to this
problem.
Benefits of issuing Green Bonds
The key benefits of issuing green bonds are as under:
i.

Positive public Relations

Green bonds can help in enhancing an issuers reputation, as this is an effective
way for an issuer to demonstrate its green credentials. It displays the issuers
commitment towards the development and sustainability of the environment.
Further, this may also generate some positive publicity for the issuer.
Investor Diversification
There are specific global pool of capital, which are earm qarked towards

ii.

investment in Green Ventures. This source of capital focuses primarily on

environmental, social and governance (ESG) related aspects of the projects in
which they intend to invest. Thus, green bonds provide an issuer the access to
such investors which they otherwise may not be able to tap with a regular bond.
iii.

Potential for pricing advantage

The green bond issuance attracts wider investor base and this may in turn benefit
the issuers in terms of better pricing of their bonds vis-a-vis a regular bond.
Currently there is very limited evidence available in this regard, however as
demand of green bonds increases it is likely to drive increasingly favorable terms
and a better price for the issuer. Further, with increasing focus of the global
investor community towards green investments, it is expected that new set of
investors will enter into this space leading to lowering the cost of funding for
green projects.

Indian Experience
India has lately seen issue of Green Bonds by three entities, brief details of which are as
under
i.

Yes Bank

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Yes Bank came out with first green bond issuance in India in February 2015, which
was a Rs 1000 crore 10-year issue. The issue was oversubscribed almost twice and the issue
proceeds will be utilised towards funding renewable energy projects such as solar, wind and
biomass projects.
Further Yes Bank came out with another issue of Green Bonds in August 2015, which
was a Rs 315 core 10-year issue. The entire issue was subscribed by the International Finance
Corporation.
ii.

CLP India

CLP India, in came out with an issue of green bonds, the first from an Indian
corporate issuer. CLP India raised Rs 600 crore. The bonds have been offered at a coupon of
9.15 per cent per annum, in three series of equal amounts and will mature every April in
2018, 2019 and 2020.
iii.

Exim Bank of India

Exim Bank came out with a dollar denominated Green Bond issue in March 2015.
The offer was of a five-year $500 million green bond. The issue was subscribed nearly 3.2
times and the proceeds from the issue would be utilised towards funding eligible green
projects in countries including Bangladesh and Sri Lanka.
iv.

IDBI Bank

IDBI Bank has raised US$350m 5-year bonds, priced at Treasuries plus 255bp, with
issue receiving an oversubscription of three times i.e. around US$1bn. Maximum investment
came from Asia at 82% of the book and rest from Europe at 18%.

Some room for improvement going forward

There are however a couple of areas where we were hoping for more clear guidance from
SEBI:

Clearer guidance on what is green: We were hoping SEBI would provide clear
definitions for what qualifies as green projects. There are several types of international
definitions and standards that could be leveraged by SEBI: for example the Climate Bonds

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Taxonomy and Standards; definitions used by large development finance institutions such as
the World Bank, IFC and the European Investment Bank; or asset specific standards such
as FSC standard for sustainable forestry(link is external) and building standards such
as LEED(link is external), BREEAM(link is external) and Energy Star(link is external).
As the market grows, moving to standardised definitions here rather than deciding on a
case-by-case basis is crucial to ensure transaction costs for issuers, investors and the
regulators stay sufficiently low to really scale the market. China, who released official
green bond guidelines a few weeks ago, included a catalogue of specific green project
criteria with their guidelines.

Requirement for independent review: In a next iteration of the requirements, it

would also be good to see a requirement for an independent review of the green credentials,
rather than making this optional. This would give investors more assurance that the green
bonds issued in the market have robust green credentials especially in the absence of clear
criteria for what is green from the regulator.
Linking Indias green bond market to its INDC
But SEBIs statement yesterday was exciting for more than just the release of the specific
requirements. The statement also included an explicit mention that SEBI are seeing the green
bond market as a key tool to help raise the finance needed to meet the ambitious targets
of Indias Intended Nationally Determined Contribution (INDC)(link is external) as
established for COP21 - essentially India's climate change action plan. Yes! This is exactly
the kind of thinking we need from governments to translate the high-level success of the Paris
agreement into real transition on the ground. The INDCs provide a great starting point for
developing pipelines of green investments that can be financed through the green bond
market. Fabulous to see India connecting the dots on this!
2016: The year for green bonds to take off in India
2015 was the year India entered the green bond market, with a total of US$1.1bn of green
bonds issued from a handful of pioneer issuers (Yes Bank, Export-Import Bank of India, CLP
Wind Farms and IDBI). Now that official guidelines are out and the government is serious

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about implementing their INDC, expect 2016 to be the year Indian green bonds really take
off! Well done, SEBI!

Conclusion
As the green bond market continues to develop, it provides public and private sector
organizations with an important source of funding for activities that can bring significant
benefits to the environment and society. However, the market is not without risks and
challenges. The lack of clear definitions of what is considered green, requirements on how
proceeds should be tracked, managed and reported on, and the lack of assurance requirements
over information reported, all need to be addressed if the market is to build credibility and
continue its rapid growth. We predicts that guidance and requirements over the use,
management and reporting of proceeds and project performance may be tightened over the
next two to three years and that patterns of standard or accepted practice should begin to
crystallize. This could have a positive impact on the market, with growing standardization
leading to lower transaction costs for issuers. This, in turn, would serve to encourage more
green bonds to be issued, greater investor interest and confidence, and a better price for
issuers. Bond issuers should take a rigorous approach to the use and management of green
bond proceeds now without waiting for mandatory requirements to emerge. Issuers that do so
are likely to build increased credibility with investors, underwriters and rating agencies, as
well as reducing their own reputational risks. Given that green bonds are long-term financing
vehicles, the reputational risk to issuers extends for many years across the life of the bond
and beyond, therefore it is advisable to seek to reduce that risk from the point of issuance
onwards.

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http://cityminded.org/what-are-green-bonds-and-why-all-the-fuss12486
http://www.worldbank.org/en/topic/climatechange/brief/green-bondsclimate-finance

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