The Role of Green Bonds in Promoting Sustainable Development in India

Introduction

Positioning the Indian economy on a path of sustainable development requires an unprecedented change in the investment of greenhouse gases, fossil fuels, and resource-intensive industries to more resource-efficient and sustainable technologies and business models. The financial sector will have to play a major role in this green initiative and invest in green finance.

Sustainable development in line with economic growth is becoming a major challenge worldwide. With growing awareness of environmentalism, it becomes essential for the financial sector to take care of its role in managing environmental problems.

(2019, Babita Jha, Priti Bakhshi).

A huge amount of funds are required to finance the adaptation and mitigation policies of climate change. India has adopted the 17 sustainable development goals. To achieve these goals and targets, a huge amount of investment is required. Green finance is a recent phenomenon in the field of finance that aligns the financial sector with sustainability. It includes both public and private finance. It means investment in those projects and businesses which are environment friendly. So, green finance has become prominent in recent years.

The important aspects of green finance are sustainable investments and banking activities, in which investment and loan decisions are made on the basis of environmental assessment and risk measurement to meet sustainability standards, and also the insurance they cover Environmental and climatic risks. The explosive growth of green bonds in the capital markets is increasingly attracting attention from investors.

The reason for green money, as built up by the United Nations Environment Program, is to expand the degree of budgetary streams (from the banking, microcredit, protection, and speculation segments) of the general population and private segments and non-benefit to maintainable advancement needs. The objective is to adjust money-related frameworks, working with nations, monetary controllers, and budgetary segments to drive capital portion to supportable advancement that will shape tomorrow’s creation and utilization designs. Money-related instruments, for example, green securities, help this arrangement as they advance private-open associations for the practical turn of events.

Green bonds offer a link to the SDGs for investors seeking sustainability and financial goals. Its innovation lies in its simplicity since, structurally, they are no different from traditional ties. The additional disclosure and transparency of green bonds on the use of revenues help to connect investors with activities that should have a positive impact on sustainability.
This report explored the extent of green bonds in India. It proposes possible measures to create a global political structure to promote the use of green bonds, which have the potential to become a viable financial vehicle for green projects.

Objectives of the study

• To understand how green bonds are different from other bonds
• To understand the functioning of the green bond market in India
• To understand how green bond as a financial instrument supports sustainable development
• To understand green bonds and sustainable development frameworks

Need of the study

This study will help in understanding what green bonds are and how & where they are used. Many people are not familiar with the term, so this research will help them understand how & for what purpose it works. This study will help in explaining how green bonds help in the sustainable development of the country.

Literature Review

Sustainable development and a sustainable economy is increasingly the concern at an international forum, bringing together international and national governments together towards environmental initiatives. Transitioning to a sustainable global economy requires financial sources for investment, which offer environmental benefits. Green bonds, along with green loans, are the main financial instruments as sources of financing for green projects.

The purpose of this research is to evaluate the development of green bonds: bonds issued by banks and dedicated to helping solve problems of sustainable development. The research is based on an overview of the pieces of literature of various research papers on sustainable development issues, bonds, and capital markets approach to the idea of sustainable development.

Understanding and explaining sustainable development in all aspects is a difficult task because of its interdisciplinary nature (environment, economy, social and political issues) (Robinson, 2003). However, some researchers have explained the meaning of sustainable development.
According to Sachs & Reid, Sustainable development simply means economic growth that is environmentally sound and has a practical necessity. Environmental goals cannot be achieved without sustainable development (Sachs, Reid, 2006).

The structure of sustainable development began in the early 1980s as a test to bridge a gap between environmental problems, with an increasing number of negative examples of environmental results from human activity and some social and political aspects of human development (Mebratu, 1998; Lozano, 2008).

Glavic and Lukman also emphasized that Sustainable development is the evolution of human society from the economic point of view, responsible according to environmental and natural processes. (Glavic, Lukman, 2007).

The financial sector has increasingly become increasingly important in accelerating change in order to stabilize climate neutrality. The first reason is the need to mobilize large amounts of private finance to meet the investment needs to meet the Paris Climate Agreement and UN Sustainable Development Goals (SDGs) (UNEP, 2015; Bielenberg et al., 2016; IEA, 2017). Another reason is the role of the financial sector in the efficient allocation of funds. This makes the financial industry an important hub for global economic activity (Hourcade & Shukla, 2013; Grubb, 2014).

There are several ways in which money can be used to promote sustainability. These include monetary and fiscal policy, investor concerns about unsafe business processes leading to mergers and acquisitions, climate policy, and the risk of climate change (Bloomberg et al., 2017), which obviously spends money on an unsafe economy (Global Canopy Plan 2016; Galaz et al., 2018; Folke et al., 2019; Gardner et al., 2019), and how does a better understanding of environmental and management size (ESG) affect the financial performance of retail goods (Barch, Bauer, and Orlitzky 2016).

Green bonds are the debt instruments that encourage sustainability and finance projects that are aimed at clean transport, sustainable water management, and the cultivation of ecological technologies. (Amelia, 2014). According to Nelson IfeanyiObine, Green bonds are generally considered as a debt security, which is used for special projects that promote environmentally friendly objectives and brownfield development sites. Brownfield sites are areas of land that are underutilized and have abandoned underdeveloped buildings, which often contain low levels of industrial pollution. (Nelson IfeanyiObine, 2018).

Green bonds work similarly to ordinary bonds. However, these bonds are issued to support green investments, i.e., to reduce the environmental impact, for example, by mitigating climate change or improving energetic efficiency. The green bond stimulates mutual cooperation between investors and issuers in the direction of increasing the funding of green investments (Kidney & Oliver, 2014).

The purpose of issuing and financing green bonds is to earn investor confidence and to ensure that capital is allocated for green investments. The issue of legitimacy is enhanced by the revision of third parties. The third-party review evaluates the correct use of green bond receipts and gives a second opinion on the issuers. The third ecological bond issuer contains a mix of independent organizations, such as ecological research houses, social issues, and groups of scientific standards (Climate Bonds Initiative, 2014).

Green securities have become an alluring instrument and developed quickly in the most recent couple of years for both private and open part associations to raise assets for ventures or different exercises that underpin the economy, condition, and society. Eight years back, green bonds didn’t exist; anyway, since 2014, the estimation of green bonds has ascended by over US$53 billion dollars remarkable. (Climate Bonds Initiative (2015).

Stephen Kim PARK analyzes the implications of investments that affect human rights, whose goal is to create positive social and environmental impacts as well as financial returns and reflecting growing awareness of the ability of world capital markets to advance sustainable development, companies, and institutional investors are looking for new financial instruments and strategies. Green bonds are debt securities sold to investors who use funds to finance projects with a defined social benefit, such as affordable housing, education, food safety, and access to medical care. (Stephen Kim PARK, 2018).

The implementation of ecological practices can also be beneficial for companies. Five drivers from the retrospective point of view could be linked to the issue of a green bond and the adoption of proactive sustainability measures: reputational benefits, legislation, stakeholder pressure, internal legitimacy, and personal reasons. A green bond could be described as a measure of proactive sustainability, as pointed out by the drivers themselves. Green investments can be accelerated if a green bond shows correspondence with some or all of the drivers. This study uses descriptive research to describe what green bonds are and how they impact sustainability.

Secondary data has been used for this study. A number of reference books, journals, and reports were used to formulate the theoretical model for the study. This study provides graphical representations of green bond market activities, such as the total number of green bonds issued and the issuers of the bond.

Concepts

In order to understand the impact of green bonds on sustainable development, we need to first understand what green bonds and sustainable development are, their aspects, and their scope and functionality.

Bonds & Green Bonds

Bonds: A bond is a form of debt security. A debt security is a legal contract for money owed that can be bought and sold between parties.

What is a green bond?

Green bonds: Green bonds are an instrument for driving an environment-friendly and low-carbon economy. Green finance/bonds are defined as ‘all forms of investment or loan that take into consideration the environmental aspects and improve sustainability.’
Green bonds are like standard bonds in that they offer investors predictable returns in the form of a fixed coupon in exchange for medium and long-term loans for economic activity.

The key contrast between a ‘green’ bond and a normal bond is that the guarantor openly pronounces that it is raising money to back ‘green’ tasks, exercises, or business exercises with a natural preferred position, for example, sustainable power source, low-emanation transport of carbon or ranger service venture.

A green bond is a bond specifically earmarked for climate and environmental projects. These are assigned bonds expected to urge supportability and to help atmosphere-related or different kinds of exceptional ecological undertakings. Countries and companies need large-scale financial instruments the help of which fund sustainable development and reduce greenhouse gas emissions.

The first entity to issue green bonds was the World Bank, which began the practice in 2008 and has since issued more than $ 3.5 billion in debt designated for climate change problems. India needs to finance ecological projects such as clean energy, clean transport, and water management. The Indian government estimated a cost of USD 2.5 billion (Quoted to the United Nations Framework Convention on Climate Change (UNFCCC)) to implement its climate change actions.

India entered the green bond market in 2015 with the Yes bank, which issued the first green bond to finance renewable and clean energy projects, in particular for wind and solar energy. Gradually, the green bond market has expanded to several UPMs, state commercial banks, state financial institutions, businesses, and the banking sector.

The green security showcase expects to empower and assemble obligation markets to fund extends that add to ecological manageability. Green bonds facilitate the raising of capital and investments for new and existing projects that present environmental benefits and can mitigate the risks associated with climate change. With over 1,500 green bonds issued in 2018, worth more than $ 175 billion, the green bond market is growing at a rapid pace. Green bond issuance exceeded $ 210 billion in 2019.

Green Bonds framework

WHY issue green bonds?

Many regular bonds raised funds for climate-aligned activities that would qualify as green without labeling them green. In terms of prices, most green bonds currently on the market have similar financial characteristics to regular bonds from the same issuer since the redemption is linked to the issuer. However, green bonds do offer some potential benefits to issuers:

• Diversification and investor demand
• More investor engagement
• Reputation and corporate awareness
• A better internal awareness of sustainability
• Government support and incentives

WHO can issue green bonds?

There are no restrictions on the type of organization that can issue green bonds. The ‘green’ of a company does not matter, although this may worry some investors and attract ‘greenwashing’ accusations. Issuers can be supranational institutions, private companies, banks, or governments.

Issuance Life Cycle

The process of issuing green bonds is similar to that of a regular bond, with an additional emphasis on governance, traceability, and transparency, designed to increase investor confidence in the green credentials of the bond and avoid ‘greenwash’ charges all ‘issuers. Below is a simple outline of a generic green bond issuance process, which may vary by jurisdiction.

Guidelines for issuing green bonds:

1. Review funding options

Issuers should review the green bond issuance business case, consider how it matches their funding objectives and sustainability strategy, and assess benefits against specific challenges, which may include: • Issuance and cost monitoring, ongoing monitoring, and report • Maintaining ‘closeness’ to conventional bonds, including returns in full, but issuer breaks agreed green clauses)

2. Choose an underwriter

3. Design green bond criteria and project selection process

There is no universally agreed standard for a green bond and the type of business that can be funded. Issuers can refer to various evolving guidelines and sources, such as the GBPs, the Climate Bond Standard, and national guidelines for guidance in defining their green bonds and the process used to determine the suitability of the project. In China, the guidelines were issued by the People’s Bank of China and the National Development and Reform Commission in December 2015.

4. Registration/ application

5. Processes and controls for the use/management of proceeds

It is recommended to establish sound management and controls for the monitoring and allocation of income to ensure that the income is used in accordance with the terms of the obligation. When designing mechanisms and follow-up processes, it is necessary to consider the following areas:

• Monitoring of revenue
• Management of revenue
• Management of unallocated revenue
• Guarantee

6. Information disclosure

7. Get a credit rating

8. Issue bond

9. Allocation of proceeds

10. Ongoing reporting

Investors are increasingly expecting to report on the allocation of income and on the environmental and/or social results of investments over the life of the bond or projects invested. In preparing the disclosure of the ecological impact of the underlying activities or investments, issuers are advised to consider: • Designing monitoring and evaluation processes in advance to monitor design performance environmental over time • Seek third party assurance to reduce data quality risks and increase stakeholder confidence in disclosure.

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