China’s first domestic green bond in January 2016. Shanghai Pudong will pay 2.95 percent annually for the three year bond issuance, an interest rate lower than traditional commercial bonds offer in China. The issue was oversubscribed by over two times, demonstrating green bonds’ attractiveness in China where demand is high for investments that curb pollution and support renewable energy. Following the green bond’s high demand, China announced a pilot of a new requirement in March 2016 for green corporate bonds on the Shanghai stock exchange. The requirement mandates the issuer to disclose details of the “green” use of project proceeds and seek independent professional verification that the projects are indeed serving “green” purposes and in line with political clean energy priorities of China. IDB’s Energy Efficiency Green Bond in Mexico The Inter-American Development Bank and Clean Technology Fund issued the first phase of a $125 million Energy Efficiency Green Bond in Mexico in March 2015. The goal is to provide an alternative financing mechanism for private sector energy efficiency projects – primarily efficiency projects developed by Mexican energy service companies (ESCOs) – through the issuance of green asset-backed securities.27 Verification and validation of environmental impacts is completed in accordance with the Green Bond Principles. What makes this bond unique is its twophased approach and long-term support for projects that reduce energy consumption. In the first phase, IDB financing warehouses up to $50 million aggregate a portfolio of ESCO projects. Then, in the second phase, the investments are securitized through issuance of green bonds in local debt markets. The Clean Technology Fund provides $19 million worth of guarantees for the portfolio of projects. ESCO funding sources are typically limited, expensive and have very short terms that are infeasible given the payback period for energy efficiency project savings. This approach overcomes those common financing barriers. Overview of Green Bonds in India India has set ambitious renewable energy goals to improve28 energy access and energy security while taking action on climate change – including target to install 100GW of solar energy and 60GW of wind energy by 2022. To scale the necessary finance to achieve these national targets, which is the centrepiece of India’s climate commitments made at the 2015 UN climate negotiations, the Government of India is working with different market players to enable market creation and remove key obstacles for mobilizing finance. Likewise, investment from multilateral and national development banks can establish standard models and provide market liquidity. RENEWABLE ENERGY The Government of India is interested in green bonds and has approached at least eight domestic lenders to raise low-cost, long-tenure funds through green bond energy plans. Encouraging national players like the Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Industrial Development Bank of India (IDBI), Indian Renewable Energy Development Agency (IREDA), and private sector entities like India Infrastructure Finance Corporation Limited (IIFCL), ICICI Bank, and Yes Bank to enter the market would help scale up green bonds in India. As more financial entities enter the Indian green bond market to provide capital for renewable energy projects of all sizes, the cost of financing prospects in the market will become more favorable. There is a significant market potential for green bonds in India. In 2015, the green bond market in India kick-started with smaller issuances of $100 million to $200 million with high potential to scaling-up. Green bonds are also diversified in terms of credit ratings (AAA to BBB) with most green bonds rated AAA to A, providing stability and higher quality of bonds. However, challenges for green bonds issuance exist, including high currency hedging cost, poor sovereign rating (BBB-) and lower tenure causing hurdles for the growth.32 Several Corporate sector engagement has increased substantially since 2013, indicating high demand among investors, including overall growth in the issuance of green bonds as well as the volume, diversity and size of issues 47 energetica INDIA · MAY | JUN16
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