GROWTH OF GREEN BOND

MARKET AND ITS ROLE IN

FINANCING SUSTAINABLE
INFRASTRUCTURE
 GREEN BOND MARKET

● Definition:
● Green bonds are fixed-income financial instruments used to raise capital for
projects with environmental benefits.
● They are typically issued by governments, municipalities, corporations, and
financial institutions.
● Purpose and Objectives:
● Fund projects aimed at mitigating or adapting to climate change.
● Promote sustainability across various sectors, including renewable energy, green
buildings, clean transportation, and sustainable water management.
 ORIGIN OF GREEN BOND
● Historical Context and Growth Trends:
● Originated in 2007 with the European Investment Bank's issuance.
● Rapid growth in recent years, with increasing issuance volumes and diversified investor interest.
● Becoming a mainstream financial instrument for funding environmentally beneficial projects.
● Key Features:
● Use of Proceeds: Proceeds are earmarked for specific green projects, providing transparency and
accountability.
● Certification and Verification: Compliance with Green Bond Principles ensures alignment with
recognized standards.
● Market Liquidity: Growing investor demand and secondary market activity contribute to market
liquidity.
● Impact:
● Addressing climate change and environmental challenges.
● Mobilizing capital for sustainable development.
● Stimulating innovation in green technologies and infrastructure.
 ORIGIN OF GREEN BONDS
Early Beginnings:
● The concept of green bonds originated in the early 2000s.
● The European Investment Bank (EIB) is credited with issuing the first green bond in 2007.
● The EIB's bond was designed to fund renewable energy a

Catalysts for Growth:

● The global financial crisis of 2008 prompted a reevaluation of investment priorities.
● Increased awareness of climate change and environmental sustainability drove demand for
responsible investment opportunities.
● Institutional investors, governments, and multilateral organizations recognized the
potential of green bonds to mobilize capital for green projects.
 GROWTH OF INDIAN GREEN BOND-
SEEDLING(2015)
● The Indian Renewable Energy Development Agency(IREDA) issued the
very first green bonds in India.
● Initially ,participation in this market was very restricted, as issuer were not
very confident of the response they might receive in the market.
● The primary focus was financing renewable energy projects particularly
solar and wind energy
 GROWTH OF INDIAN
GREEN BOND-TREE(2017)
● This era was turning point for this market.
● One of the growth of this sector is the involvement of private sectors and PSU.
● It gave more holistic approach towards sustainable development.
● Funds started flowing into clean transportation project like electric vehicles and
metro system.
 GROWTH OF INDIAN
GREEN BOND-FRUIT
● The total issuance in the market has reached an impressive USD 21 billion.
● The private sector is still dominant player in the market, contributing over two-thirds
of total issuance.
● This demonstrates the private sector’s growing commitment to environmental
sustainability.
● An increasing number of clean transport initiative like metro system and electric cars,
are being funded via green bonds.
● Green bond is now funding initiatives that increase the energy efficiency of
buildings,support environmentally friendly water management techniques and
advance a more comprehensive approach to environmental sustainability.
 ORIGIN OF GREEN BONDS

Evolution and Expansion:

● The green bond market has experienced rapid growth and evolution since
its inception.
● Expansion beyond traditional issuers to include corporations,
municipalities, and sovereigns.
● Introduction of innovative structures such as sustainability-linked bonds
and transition bonds.
 KEY PLAYERS INSTITUTION
Multilateral Development Banks (MDBs):
● Leading issuers of green bonds, including the World Bank, European Investment Bank (EIB)
a. Pioneer green bond issuers, setting standards and promoting best practices.
● Governments and Municipalities:
a. National and local governments issue green bonds to fund environmental projects.
b. Examples include the governments of France, Sweden, and the city of Cape Town.
● Corporates:
a. Companies across various sectors issue green bonds to finance sustainable initiatives.
b. Notable corporate issuers include Apple, Google, and Unilever.
● Financial Institutions:
a. Banks and financial institutions play a crucial role in underwriting and distributing green bonds.
b. Institutions like Citibank, Bank of America, and HSBC are active players in the green bond market.
● Supranational Organizations:
a. Organizations such as the International Finance Corporation (IFC) and European Bank for Reconstruction and
Development (EBRD) issue green bonds to support sustainable development projects.
● Investors:
a. Institutional investors, asset managers, and pension funds are key participants in the green bond market.
KEY PLAYER INSTITUTION

● Demand for green bonds is driven by investors seeking to align

their portfolios with environmental objectives.
● Regulatory Bodies and Standard-Setting Organizations:
● Organizations like the Climate Bonds Initiative (CBI) and the
International Capital Market Association (ICMA) develop
standards and guidelines for green bonds.
● Regulatory bodies may provide incentives or requirements for
green bond issuance to promote sustainable finance.
Regulatory Frameworks: Ensuring Green Bond
Credibility
● Use of Proceeds: Clearly defines eligible green projects categorized by
environmental benefit (renewable energy, clean transportation, etc.).
● Process Management: Describes the issuer's internal process for
selecting green projects and allocating the raised funds.
● Impact Reporting: Issuers are responsible for reporting on how the
proceeds are used and the environmental impact of the funded projects.
● External Review: While voluntary, the GBP recommends that issuers
obtain an independent review by qualified external reviewers to verify
their alignment with GBP principles.
 Alternative Standards: Climate Bonds
Initiative (CBI)
The Climate Bonds Initiative (CBI) offers a more rigorous certification standard than
GBP.CBI certification provides a "Climate Bonds Certified" label for issuances that meet
stricter criteria.

CBI focuses on four core areas:

● Climate Impact: Projects must demonstrably mitigate climate change or adapt to
its effects.
● Positive Environmental & Social Impacts: Projects should avoid negative
environmental or social consequences.
● Transparency: Issuers must provide detailed information on project selection
 Performance in the Current Scenario
● Market Growth: Green bond issuance has witnessed significant growth in recent years.
According to the Climate Bonds Initiative, global green bond issuance reached a record
high of USD 1.6 trillion in 2022. [Climate Bonds Initiative,
https://www.climatebonds.net/]
● Geographic Trends: Issuance is concentrated in developed economies, with Europe and
North America being the leading issuers. However, emerging markets are showing
increasing interest, with China being a notable player.
● COVID-19 Impact: The pandemic initially caused a temporary slowdown in green bond
issuance in 2020. However, the market rebounded strongly in 2021 and 2022, reflecting
continued investor demand for sustainable investments.
● Financial Performance: Green bonds generally offer competitive yields compared to
traditional bonds..
Underperformance: Year-to-date, the S&P Green Bond Index has experienced a return of
-2.73%, lagging behind the broader market [1].Reason: Rising interest rates tend to
disproportionately impact longer-duration bonds, a characteristic of many green bonds.

Long-Term Performance

Mixed Picture: Studies suggest green bonds generally track conventional bonds over
extended periods, with similar duration-adjusted returns [2].

Greenium Defined: The difference in yield between a green bond and a comparable
traditional bond.

Historical Context: Green bonds often offered a positive greenium, reflecting investor
demand for these securities.Recent Trend: The greenium has narrowed as the supply of
green bonds has increased.
 India Sovereign Green Bond: A Case Study in Green Financing
India's sovereign green bond issuance is a significant development in the country's climate finance
strategy. Here's a deeper look at the details mentioned in the World Bank document:

Framework for Selecting Green Projects:Eligible Categories: The Indian government established a
framework outlining categories of projects that qualify for green bond funding. These categories align
with the country's climate goals and encompass areas like:

● Renewable energy (solar, wind, etc.)

● Sustainable transport (electric vehicles, public transport infrastructure)
● Energy efficiency (upgrades to buildings and industries)
● Climate change adaptation projects (flood protection, water management)
● Evaluation Process: A committee assesses potential projects against predefined criteria to
ensure they meet environmental and social sustainability standards. This ensures the bond
truly finances green initiatives.
 Challenges of Green Bonds
● Greenwashing: Up to 80% of green bonds lack strong environmental standards, according to
a 2023 report by NGOs [1]. This lack of clarity and potential for misleading marketing tactics
undermines investor confidence in the green bond market.
● Limited Transparency & Verification: Inconsistent reporting frameworks and verification
processes make it difficult for investors to track the environmental impact of their
investments. This lack of transparency discourages some investors and hinders the growth of
the market.
● High Issuance Costs: The additional costs associated with verification and green certification
can be a barrier for some issuers, particularly smaller companies or those in emerging
markets. This limits the diversity of green bond offerings.
 Opportunities for Green Bonds

● Expanding Investor Base: Green Sukuk, Islamic bonds compliant with Sharia law principles
and financing sustainable projects, can attract a wider investor pool, including the Islamic
finance sector with $3 trillion in assets [2]. This could significantly increase capital available
for green investments.
● Emerging Markets: Emerging economies have a vast need for sustainable development
funding. The green bond market can play a crucial role by financing clean energy, water
infrastructure, and climate-resilient agriculture projects in these regions. Estimates suggest a
$2.5 trillion annual green investment gap in developing countries [3].
● Standardization & Regulation: Clearer definitions and international standards for green
bonds will boost investor confidence and market growth. Collaboration between regulators,
standard-setting bodies, and the financial industry is key to achieving this.
Looking Forward:
Despite recent underperformance compared to the broader market,
green bonds hold long-term promise. As environmental
considerations gain importance, green bonds may offer both
financial returns and positive environmental impact. By addressing
the challenges and capitalizing on the opportunities, the green bond
market can play a vital role in building a more sustainable future.