Green Bonds

CASE STUDIES INCLUDED:

 WORLD BANK GROUP
 INDIAN FINANCIAL RAILWAY CORP.
 ADANI GROUP

Submitted to: Dr. Aashima Arora

Submitted by: Muskan Maheshwari - 17051

Lakshya Kumar – 17050
BMS 3FA
ABSTRACT
Amidst the growing awareness about the deterioration of the physical environment around us
in the wake of growing industrialization and economic activity, a lot of institutions,
individuals, companies etc. have come to realise the importance of sustainability and
ecological protection.

With sustainable development goals in place, agreements set up at the global level to cut on
carbon emissions and the growing importance of ESG framework has led corporates to
develop a new financing instrument i.e. the green bonds

In this case we further explore green bonds as a financing instrument with regards to what
is the process of issuing a green bond through the case of green bonds issued by the world
bank setting up a foundation for the global green bond market and further we dwell on the
Indian green bond market through the case of Indian railway finance corporation and Adani
Green energy

OBJECTIVE:

We aim to answer questions like:

What are Green Bonds?

Who can issue Green Bonds?

What is the process of Issue?

Why issue Green Bonds?

What are Green Bonds used for?

What is Assurance? Why do we need an Assurance?

A green bond is like any other regular bond but with one key difference: the money raised by
the issuer are earmarked towards financing `green' projects, i.e. assets or business activities
that are environment-friendly. Such projects could be in the areas of renewable energy , clean
transportation and sustainable water management.

Green bonds enhances an issuer's reputation, as it helps in showcasing their commitment to

wards sustainable development. It also provides issuers access to specific set of global
investors who invest only in green ventures. With an increasing focus of foreign investors
towards green investments, it could also help in reducing the cost of capital.

In 2007, green bonds were launched by few development banks such as the European
Investment Bank and the World Bank. Subsequently, in 2013, corporates too started
participating, which led to its overall growth. Back home, Yes Bank was the first bank to
come out with a issue worth Rs 1,000 crore in 2015. Following this, few other banks too had
green bond issuances. CLP India, was the first Indian company to tap this route. So far, Rs
7,200 crore has been raised via green bonds.

CASE 1: WORLD BANK CASE:

The WBG Climate Change Action Plan (2016-2020) lays out ambitious targets to be met by
2020, including increasing the climate-related share of the WBG’s lending to 28%, helping
client countries add 30 gigawatts of renewable energy, put in place early warning systems for
100 million people, and develop climate-smart agriculture investment plans for at least 40
countries, among other priorities

> Background

The World Bank (IBRD) is a leader and pioneer in the green bond market. The World Bank
has issued almost USD 10 billion green bonds in 18 currencies for both institutional and retail
investors around the world. In 2008, it issued the first plain vanilla green bond ever, setting
the foundation for today’s global green bond market.

The World Bank’s program was originally designed in consultation with institutional
investors looking for a highly rated fixed income product where the proceeds would be used
for climate-specific purposes that they could report back to their stakeholders On. Investors
often publish details of these investments to show their stakeholders that their investment
strategy promotes a positive impact on the climate and society.

> The World Bank Green Bond process

World Bank green bonds have the same financial terms and risk as other bonds and follow a
process that the World Bank established in 2008 for its first green bond that has been the
model for the Green Bond Principles. The key Elements of the World Bank Green Bond
Process are:

1. Define eligibility criteria :

World Bank green bonds support the financing of projects that promote a transition to low-
carbon and climate resilient growth in client countries targeting climate change mitigation
and adaptation.

2. Establish a project selection process :

All World Bank projects – including Green Bond Projects – undergo a rigorous review and
approval process to ensure that the projects meet client countries’ development priorities. The
process includes early screening to identify potential environmental or social impacts and
designing policies and concrete actions to mitigate any such impacts.

3. Ring-fence bond proceeds (held in a separate account) earmarked for Eligible projects:

World Bank green bond proceeds are credited to a special account. They are invested in
accordance with IBRD’s conservative liquidity policy until used for the support of the World
Bank’s financing of eligible Green Bond Projects.
4. Report on projects supported including the positive climate impact :

World Bank green bonds support 88 projects in 24 member countries. About 30% of the
projects are in China, and the table below provides some examples of these projects. As of 30
June 2016, D 14.4 billion had been committed with 78% supporting mitigation and 22%
supporting adaptation. In addition to spanning the globe, eligible projects also cover different
sectors including renewable energy and energy efficiency (37%) of the total investments),
transport (35%), agriculture, forestry and ecosystems (13%), water and waste management
(9%), and resilient infrastructure (6%).

Benefits and potential of green bonds

The World Bank’s green bonds program has raised the awareness of financial market
participants of the need for private sector financing to tackle the climate challenge and
include climate risks and opportunities in their investment decisions. More issuers are
recognizing the benefits of issuing green bonds for business reasons and to enhance their
brand, and are expanding investment opportunities for investors. Green bonds are catalysing a
development of changing investor expectations in the fixed income markets – investors are
asking for social and environmental impact for all investments and require information to
include this in their investment decisions. The World Bank is working with issuers to help
them understand the product, its costs and benefits, and with issuers, investors, intermediaries
and market participants to create more financial products that support climate change
programs.

Why is the World Bank issuing green bonds?

Climate change is a threat to the core mission of the World Bank: eliminating extreme
poverty and boosting shared prosperity. The impacts of climate change are already being felt
by millions of people and can reverse economic progress. Without further action to reduce
extreme poverty, provide access to basic services, and strengthen resilience, climate impacts
could push an additional 100 million people into poverty by 2030.
CASE 2: IRFC - Indian Railway Finance Corporation

Background and Profile

Established in the year 1986, Indian Railway finance corporation has been working as a
dedicated financing arm for the Indian Railways, responsible for procuring funds both from
the domestic and international capital markets

The administrative control of the IRFC lies with the Ministry of Railways, Govt. It is also
registered as Systemically Important Non–Deposit taking Non Banking Financial Company
(NBFC – ND-SI) and Infrastructure Finance Company (NBFC- IFC) with Reserve Bank of
India (RBI).

The IFRC is primarily endowed with the task of meeting Extra budgetary resources
requirement of the Indian Railways through market borrowings at the most competitive
rates.Thus, the major objective is to mobilise funds from various financial markets to finance
various assets which are then leased out to the indian railways

About the Green Bond

Indian Railways Finance Corporation (IRFC) has issued its inaugural green bond on behalf
of Indian Railways, the world’s fourth largest rail network. The landmark $500m Climate
Bonds Certified issuance will fund a series of low carbon improvements to Indian Railways
infrastructure and rolling stock and was listed on the London Stock Exchange International
Securities Market today. The 10-year Green Fixed Rate Senior Unsecured Reg S only
issuance achieved the following milestones:

· First Certified green bond issuance by IRFC

· Tightest spread over US Treasury achieved by any Indian public sector undertaking
(“PSU”) issuer for a 10-year transaction over the last decade

· Tightest spread over US Treasury achieved for any Indian Issuer for a 10-year Reg S only
transaction over the last decade

Following acted as Joint Lead Managers and Joint Book Runners on the issuance by IFRC

 Standard Chartered Bank

 Barclays PLC

 SBI Capital Markets

IRFC is the third state-backed entity to issue Climate Bonds Certified Green Bonds.

According to Standard Charted,The order books were oversubscribed by 3.2x, a testimony to

strong investor preference for such type of high-quality credit from India. T. The coupon rate
for this green bond with a maturity period of 10 years i.e. due in 2027 is 3.835% and is also a
USD denominated bond

The Investor base for this issuance was geographically diversified : Investors from Asia
(Singapore, HK, Taiwan, Tokyo), Europe (Denmark, UK, Germany, Switzerland), and the
Middle East. By Investor Type Breakdown was 64% to Fund / Asset Managers, 24% to
Insurance, 10% to Banks and Private Banks and 2% to Others

Rationale for the Issuance of the bond

In the wake of transition towards sustainable transport infrastructure development the IFRC
perceives Green bonds to be an appropriate financing tool. IFRC seeks to widen their investor
base that aim towards investment in green projects

Framework overview

The Green Bond Framework is established in accordance with the Climate Bonds Standard
version 2.1 and also adheres to the Green Bond Principles, 2017 issued by the International
Capital Markets Association (ICMA).The Green Bond framework lays down the processes of
raising funds from such green bonds and the usage of the proceeds from such issuance to the
projects as consistent with IRFC’s sustainable values

Use of proceeds

The issued Green bonds will be used as financing tool for “eligible green projects” which will
entail the following, subject to availability of sector-specific technical criteria under Climate
Bonds Standard:

Dedicated freight railway lines

• All infrastructure, infrastructure upgrades and freight rolling stock (locomotives, carriages,
wagons, trucks, flats, EMUs, container, cranes, trollies of all kinds and other items of rolling
stock components) for electrified freight lines

• All infrastructure, infrastructure upgrades and freight rolling stock for non-electrified
projects meeting the universal freight threshold Note: Infrastructure and rolling stock for
dedicated freight railway lines that are built with the overriding objective of transporting
fossil fuels will be excluded

Public Passenger Transport

• All infrastructure, infrastructure upgrades and rolling stock for electrified rail

• All infrastructure, infrastructure upgrades and rolling stock for non-electrified projects
meeting the universal passenger threshold

Management of proceeds
Proceeds raised by IRFC will be exclusively and immediately used to finance and/or
refinance the Eligible Green Projects as defined above. At the end of each calendar year, the
net proceeds of the issuance will be reduced by the amounts invested in Eligible Green
Projects in such annual periods.For efficient management of accounts and proceeds rom
green bonds issuance IFRC has put in place an internal control system. This system is
facilitated by a professional firm of Chartered Accountants engaged as Retainer of Accounts.
Thereafter, the same is audited periodically by the Internal Auditors. To facilitate segregation
and monitoring of proceeds an accounts manual and Internal Audit Manual has been set .
Further, there is also a policy for temporary placement of funds with the Banks in order to
strengthen its cash management system. The balance issuance proceeds over and above the
full allocation to eligible green projects are invested in fixed deposits with commercial banks

Assurance

IRFC Green Bond framework will be published on its website (http://irfc.co.in/). IRFC's
Green Bond Framework will be reviewed by independent third party viewers and certified by
Climate Bonds Initiative for the Green Bond issue(s). IRFC will also get post issuance
reviewed by an independent third party reviewer, on the basis of which certification will be
obtained from the Climate Bonds Initiative to assure that the use of proceeds allocation,
ongoing eligibility of the projects and assets, adequacy and output of the Issuer's internal
control and systems and use of funds not yet allocated are as per the framework established.
Post issuance Certification will be completed within one year from the date of issue of bonds.

CASE 3: ADANI GREEN ENERGY LIMITED

Adani Green Energy Limited (AGEL) is an Indian renewable energy company headquartered
in Ahmedabad, Gujarat It is owned by Indian conglomerate Adani Group.The company
operates Kamuthi Solar Power Project, a photovoltaic plant that is amongst the largest in the
world.

USAGE OF GREEN BONDS

In May, Adani Green Energy raised US$500m from a 5.5-year senior secured green bond at
6.25%, inside initial guidance of 6.5% area.

In late 2019, AGEL became the first Indian company to offer investment-grade US dollar
green Bonds worth US$ 362.5 million to foreign investors The bonds got listed on Singapore
Exchange Securities Trading Limited (SGX- ST) on October 15, 2019 and it will mature on
the same date in 2039.
USE OF PROCEEDS

AGEL will use the bond proceeds for refinancing the eligible green projects. Net proceeds
from the bond after deducting fees and expenses will be deposited in an Escrow Account. The
funds in the Escrow Account will be used to refinance Foreign Currency Loan, Indian Rupee
Borrowings and shareholder loan stemming from expenditures related to the eligible projects.
The nominated projects and assets that are proposed to be associated with the Issuer’s green
bond offering include 25 solar projects (24 operational projects and 1 near completion
project) with a cumulative capacity of 930 MW in the states of Punjab, Andhra Pradesh, Uttar
Pradesh, Rajasthan, Karnataka, Telangana, Chhattisgarh and Maharashtra in India.

PROCESS:

Adani Green Energyappointed Barclays, Citigroup, Credit Suisse, Deutsche Bank, JP

Morgan, MUFG and Standard Chartered as joint global coordinators and book runners to
arrange fixed investor meetings in Asia, Europe and the United States from September 25 for
a long-dated green dollar bond offering.

An offering of 144A/Reg S benchmark size senior secured green dollar bonds will follow,
with a final maturity of 20 years and a weighted average life of 13.35 years, subject to market
conditions.

The notes were rated BBB– by Fitch.

KPMG provided an independent assurance on the issuer's green bond framework.

KEY FEATURES -

The firm also added the laurel of being the first Indian private firm to issue Green Bond of 20
years. It was able to achieve this as it had a long duration contract for supply of electricity
generated with distribution companies.

The US$362.5m amortising green bond had a door-to-door maturity of 20 years, and a
weighted average life of 13.47 years. This was the first deal from India to use an amortising
project finance-type structure, setting a template for infrastructure developers looking to lock
in long-term funding and lower interest costs without the refinancing risk of a bullet maturity.

The structure also met growing global demand for duration and gave foreign investors the
first chance to buy an investment-grade bond from India’s renewable energy sector.
WIDER REFLECTIONS

BENEFITS
The benefits of issuing green bonds fall into two distinct categories.

The first relates to the pricing and demand for green bonds. All of the case studies point to
strong market interest in green bonds, as indicated by the number of investors that have made
commitments to responsible investment and that have made explicit commitments to increase
their investments in areas such as renewable energy and low carbon technologies.
Furthermore, investors are increasingly aware of and attracted to the investment opportunities
in areas such as clean transportation, energy efficiency, clean energy and technology, forestry
and climate adaptation143. This market interest can enable issuers to tighten the pricing of
green bonds from initial pricing guidance; while the exact amount differs between issuers
(and is clearly driven by a variety of factors) the case studies suggests a range of between 0.5
and 5 basis points tighter than initial pricing guidance.

The second set of benefits relates to the issuer’s organisation as a whole. The case studies
suggest that issuers can attract new investors to their register (i.e. investor base
diversification). Issuers can also use green bonds to demonstrate and financially articulate
their co mmitment to environmental investments, thereby providing positive publicity and
branding opportunities. As just one example, Nafin had its green bond verified and certified
because it wanted to ensure as much credibility as possible for its return to the international
markets.

WAY FORWARD

The first is that “success breeds success”. The case studies demonstrate that positive
experiences with the issuing and marketing of green bonds increase the likelihood that other
green bonds will be issued, both by the organisations themselves (e.g. Adani,Nafin, the
Province of Ontario, and the World Bank have all issued more than one green bond) and can
potentially provide examples for other issuers to follow.

The second is that the successful issuing and marketing of green bonds also leads to the
development of capacity and expertise in the market. The World Bank’s green bonds program
has raised the awareness of the need and opportunities for private sector financing to tackle
the climate challenges and of the importance of investors including climate risks and
opportunities in their investment decisions. This program has also led more issuers to
recognise that green bonds can be a valuable source of additional capital and can additionally
provide brand and reputation benefits.

The third is that the process of issuing green bonds links issuers to investors, and helps
engage the broader financial system in green finance and sustainable and responsible
investing. Through this effect of engaging mainstream investors, green bonds contribute to
establishing the foundations for capital markets to focus on and contribute to sustainable and
responsible investing. As such, they offer a valuable way of generating capital for projects
that boost green growth and they support countries in making the transition towards
becoming low-carbon economies.

The actions that the public sector can take to encourage the development of the market
include issuing their own green bonds (as well as investing in them). Not only will these raise
the required capital for green investments but such exemplary issuance will also catalyse and
accelerate subsequent issuances by other issuers following suit. Secondly, policy makers can
introduce policy and regulatory measures geared at aggregation, technical assistance and
credit enhancement. Finally, the public sector can also promote knowledge transfer and
capacity building on green bonds through supporting initiatives and international fora that
foster mutual learning through a cooperative approach.

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