Environment conservation and sustainable development has become a priority for governments all over the world. With an increasing concern over climate change, countries are now exploring alternate means to capitalise on renewable energy. According to a recent study, developing economies such as India will become the core of green growth in the years to come.
The scope of Green Building Industry in India is huge owing to the thrust on smart cities and rapid urbanisation. Due to this, several states have begun considering mandatory energy conservation and green building codes in addition to offering sops for green construction. For example, cities like Noida and Pune offer both property tax benefits and additional building construction space for green construction.
As per a recent study by US Green Building Council (USGBC), the green building industry in India will grow by 20 per cent driven largely by environmental regulations and demand for healthier neighbourhoods, New high-rise residential, communities and mixed-use development are expected to be the top three sectors for green building growth in India.
Green projects demand a huge capital infusion. Given the requirement of capital to address the lack of adequate funds and cater to the growing demands, the financial institutions are now exploring various means to raise funds.
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Green bonds are one of the many debt instruments. Relatively new to the world of finance, these were introduced in 2007 by development banks. However, in 2013, corporate started participating in these too. Green Bonds are standard bonds with ‘green’ as a bonus feature. Issued to raise capital to exclusively fund sustainable projects, assets or business activities with an environmental benefit, these are known to offer better returns.
The Green Bond market in India is still at nascent stage. Currently, only a few banking institutions have raised money through green financing with PNB Housing being the most recent. PNB Housing is the first Housing Finance Company to issue non-convertible debentures (NCDs) to International Finance Corporation (IFC). The green bonds have been issued at a fixed coupon rate of 8.01 per cent payable semi-annually with the tenure of 5 years compared to the other NCD rates in the range of 8.40 per cent – 8.60 per cent for the same tenure.
Over the years, the investor appetite for green bond has increased. Investors, globally, are increasingly focused on integrating Environment, Social and Governance (ESG) factors into their investment processes. Therefore, Green bonds give the issuers an access to a wide pool of investors as compared to regular bonds or other asset classes.
Currently, world over Investors with $45 trillion of assets under management have made public commitments to climate and responsible investment – green bonds can help them achieve their pledges in fixed income. The huge demand for these bonds is coming from a range of investors including mainstream institutional investors, specialist ESG (Environmental, Social, Governance) and responsible investors, corporate treasury, sovereign and municipal governments, and retail
In January 2016, SEBI rolled out a concept paper defining the guidelines for issuance and listing of Green Bonds. The scope of improvement in Indian green bond market is huge if supplemented with tax benefits, interest subsidies and capital relief to the issuers as well as investors. As the green bonds market continues to develop, the issuer and investor interest is expected to increase in the coming decade.
(The author of the article is managing director, PNB Housing Finance Limited. Views expressed here are personal.)