Debt instruments are vital to increasing and incentivizing developmental projects. Of these, Sustainability Bonds and Green Bonds play a large role in sustainability efforts in global fixed income markets. As the importance of alignment with the Kyoto Protocol, Paris Agreement, and Sustainable Development Goals increase, such bonds are fast becoming the bedrock for infrastructure development across sectors.
Bonds are IOUs or debt instruments allowing the issuer to repay the principal amount immediately after maturity. They can be secured by collateral, or unsecured, backed by the credit performance of the corporate/public issuer. The interest is paid over fixed intervals over a period of time. This allows the issuer to immediately begin financing the implementation/construction of large projects with long time horizons. Bonds do not provide investors with an equity stake in the issuing organization but rather a creditor stake, which holds priority over stockholders. Thus, their repayment is assured ahead of stakeholders in the event of bankruptcy. Many of the guidelines for issuance are obtained from the industry-group International Capital Market Association (ICMA).
Types of Bonds
Bonds are often differentiated into proceeds bonds and sustainability-linked bonds. The former funds projects with specific environmental and/or social objectives, including Green,Social, and Sustainability bonds. Green bonds are issued to finance or refinance projects with positive environmental impacts, such as renewable energy, energy efficiency, transportation, buildings and infrastructure, waste and wastewater management, and climate change adaptation and resilience projects. Since they align with the Paris Agreement, they are among the significant climate or green finance products. Organizations and projects can issue green bonds at any stage of development. Voluntary issuance guidelines include Green Bond Principles (GBP) from the ICMA that promote transparency and standardized reporting on the environmental objectives and estimated impact linked to the financing conditions of the bond. Differentiations from Green bonds include Unlabeled Green bonds for issuers aligned with low-carbon products or services, e.g., renewable energy and municipal water management. Climate Leaders bonds are issuers recognized to be leading the Net Zero movement and transition in their respective industries by reducing net emissions and plastic/water/land consumption and acting against environmental and biodiversity degradation. Innovative green bonds include mini-Green bonds, which help non-listed businesses secure finance on a smaller scale. Green bonds and their variations are thus available for all scales of organizations to take advantage of.
Similarly, Social bonds finance social projects or activities to address social issues and achieve positive social outcomes. This includes projects with communities below-poverty lines, the marginalized, the displaced, refugees, migrants, the unemployed, and the disenfranchised. Historically disadvantaged communities such as women, sexual and gender minorities, discriminated, and disabled communities are encouraged too. The ICMA also sets voluntary guidelines, such as the Social Bond Principles (SBP), following similar philosophies to the GBP. Examples include bonds for socio-economic development, food security & infrastructure, housing infrastructure, essential services, and the newly emerging COVID-related bonds to help mitigate social issues among the most impacted populations due to the pandemic. Sustainability Bonds, meanwhile, cater to the combination of social and environmental activities aligned with the GBP and SBP.
Sustainability-linked Bonds fund the explicit functional sustainability activities of general projects. They are often conditionally linked to the issuer achieving climate, SDG, and ESG goals and measured through specific Key Performance Indicators (KPIs) or fulfilling commitments to the SDGs. The planned outcome is to incentivize the adoption of corporate sustainability measures to align with the Paris Agreement.
Investors’ Perspective
The Indian sustainability bond market is growing at a rate faster than most other countries, with $8B worth of green bonds in India, the most popular in the section in the country, since Jan 2018 (0.7% of total bonds), and in 2021 alone this number was above $6B [1]. While India’s share of the total market has reduced in this period, this indicates widespreadadoption in other countries. Experts believe Indian organizations can raise $25B from 2022-24 [2].
Yet, there is a lot of work to be done – to achieve India’s Net-Zero 2070 obligations, India would need upwards of $10T, which means that currently, not even 1% of the investment required is being satisfied by green bonds. This also means that the investments needed are twice as large as the $5T target set by the Indian government. Thus, apart from foreign funds, governmental regulations must highly incentivize the growth of the bond market. The government took steps towards this by launching $3.3T worth of Sovereign Green Bonds, backed by the sovereign promise of the government itself. Moreover, the World Bank also has issued several green bonds to fund developmental projects in India.
India Inc is also warming up to the idea, with 2021 seeing key issuances by JSW Hydro, Greenko, ReNew Power ($400M for 5.25 years at 4.5% on the Singapore Exchange), and Adani Green ($750M for 3 years at 4.375%), among India’s largest (renewable) power operators. In fact, the JSW Group, which raised $1.6B in 2021 from green bonds, has announced plans to switch most of its debt financing issuances to green bonds. Public banks, such as the State Bank of India (SBI), also issued green bonds worth $650M in both Indian and Luxembourg markets.
There is some criticism of the sustainability bonds section, as there is a perceived lack of regulatory oversight and susceptibility to greenwashing by issuers. Moreover, issuers, especially larger ones, can take advantage of price differences between markets to indulge in arbitrage, aided by the ‘Green Premium,’ viz., the additional cost of using clean/green products over conventional ones. Most importantly, the Indian government has still not presented overarching regulations governing green bond issuances – though some features are covered by the Securities and Exchange Board of India (SEBI).
Author’s Take | The sustainability section of bonds provides quite an incentive for issuers and investors to fast-track their development and support their Net-Zero ambitions and social benefit. As an instrument increasingly available to all scales of operation, the author sees much potential for wide-spectrum grass-root level change, which is essential for systemic change.
About the author Krishnakumar Ramachandran | Krishna is a Biosystems Engineer and Biotechnologist with a background in sustainability, biobased transition, bioplastics and biofuels, energy, agribusiness, and natural resources. Having worked in R&D and having started up, he ‘transitioned’ to sustainability to make a tangible impact to people and the environment. As a freelancer, he works with sustainability consultancies in ESG, GHG accounting, carbon offsets and credits, and tech-advisory. He writes articles on sustainability strategy, corporate sustainability, energy transition risks.