1. Alternate investing: Fight the climate change menace and reap returns too

Alternate investing: Fight the climate change menace and reap returns too

WITH the fight against climate change on in earnest, 'green investments' are gaining in popularity. Such an investment...

By: | Published: March 10, 2015 12:05 AM

WITH the fight against climate change on in earnest, ‘green investments’ are gaining in popularity. Such an investment, however, could be a standalone, or a subset of a broader theme, or closely related to other approaches, such as socially responsible investing (SRI), environmental, social and governance investing (ESG), sustainable, long-term investing, or any similar concept.

The rationale

Apart from financial considerations, people may want to invest in green companies or assets for ecological, ethical, scientific, political or social purposes. The reasons, however, are not mutually exclusive. Different investors have different priorities, risk-return profiles and rankings of motivation. For most companies, financial considerations remain the key motivator. On the other hand, for a foundation, it might all be about an explicit green policy or ethical targets.

Green bonds

Green infrastructure bonds are a relatively new concept. These bonds are generally issued to finance infrastructure projects in renewable energy or energy efficient projects, such as solar power, wind power, biomass and small-scale hydel projects.

Worldwide, green bonds have raised around $35 billion so far, whereas the Indian market is quite nascent, or even non-existent. Recently, one of the private banks floated India’s first green infrastructure bonds with a tenure of 10 years. It received a commitment of R1,000 crore against a targeted R500 crore. IFC invested around $ 50 million in this issue. This should encourage other issuers to come up with such bonds.

Green bonds — popularly known as climate bonds — are fixed-income financial instruments, linked directly or indirectly to climate change solutions. They are issued with the purpose of raising funds for climate change mitigation or adaptation-related projects. The project could range from clean energy to greenhouse gas emissions, and so on.

Green bonds are quite similar to normal bonds issued by the government, banks or companies in the sense that the issuing entity gives an assurance to repay the principal over a definite period of time along with a fixed rate of interest. These bonds are normally asset-backed, with an assurance that the funds raised would be utilised towards climate-related projects.

Green bonds typically fund large-scale, capital-intensive, green infrastructure projects that can be repaid by steady, modest, long-term cash flows. Green bonds are less appropriate for funding new technologies with a higher default risk.  Green bond investors tend to be more risk-averse, opting for the low-risk, low-return vehicle of a bond. This is important as some types of sustainable technology are still experimental, and associated with higher volatility.

Green bonds normally have an investment grade, without which gaining investor confidence is tough.

Types of green bonds

Green bonds could be asset backed — tiled to specific green or infrastructure project; corporate bonds — issued by a green company; or bonds issued by an international financial institution  to raise capital for a green project. Green bonds could also be structured with a link to inflation or a green index.

Investment approaches

Over the years, a number of different green investment approaches has been developed. The main strands are:
*  Negative screening, exclusion of undesirable products (for example, tobacco, palm oil) or sectors (e.g., the arms industry, nuclear industry);
* Positive screening or selection of assets (contrary to the above approach);
* Investment in ‘green themes’
* Engagement, activism, voting (to make companies greener); and
* Integration of green/ESG factors in the general investment analysis.

These approaches are not mutually exclusive. Generally, investors often use a combination of different green and ESG approaches.

The writer is associate professor of finance and accounting at IIM, Shillong

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