Financing India's Clean Energy Goals

Channels: Green Bonds

Companies: Yes Bank

"The Paris Agreement is a bridge between today's policies and climate-neutrality before the end of the century," reads European Commission's COP21 page.

Rana Kapoor (Managing Director and CEO, YES BANK) and Nikhil Rathi (CEO, LSE Plc) at the LSE Opening Bell Ringing Ceremony in February, 2016

A $100 billion-per-year commitment, starting in 2020, is estimated to be required to combat climate change for sustainable development. Such amounts are expected to flow through novel and innovative financial instruments, from developed countries to fund multifaceted green projects and initiatives in developing countries.

The negotiations in Paris did not just focus on national commitments to reduce greenhouse gases, but placed emphasis on the financial aspect of the commitment.

Given this premise, the role of businesses, especially financial institutions in developing countries, will be crucial to the success or failure of the Paris Agreement.

Climate finance has emerged as cornerstone of the Paris Agreement, with efforts to limit climate change being stepped up to unprecedented levels.

India recently ratified the Paris Agreement. During the ratification, it submitted its nationally determined contributions for the period 2021 to 2030, to reduce the emissions intensity of its GDP by 33-35% from 2005 levels, and to achieve 40% cumulative installed capacity from non-fossil fuel based energy resources.

Additionally, it has committed to create an additional carbon sink of 2.5–3 billion tonnes of CO2 by increasing forest cover.

All these climate change actions are expected to require an estimated budget to the tune of $2.5 trillion.

YES BANK issued India's first ever green bond

Along with a requirement of $2.5 trillion for NDCs until 2030, over the next five years India faces the world biggest financing challenges, including bringing 100 million families into the financial system, and bringing affordable and reliable supplies of clean water and energy to all of its 1.3 billion inhabitants.

Building smart cities to ensure safe and resilient living spaces, and improving irrigation in India's primarily agrarian economy are indispensible national agenda items which will need consistent effort alongside its ratification commitments.

In addition to these extremely capital-intensive developmental initiatives, India has also committed to achieving 175GW of renewable energy to meet its growing energy demand and reduce its carbon intensity. This will need an enormous amount of will, action in terms of policy and regulatory intervention, innovation in technology and, of course, financing mechanisms. This serves as an opportunity for banks to look at bonds, where the proceeds go to infrastructure.

Realising the potential of green bonds being issued in developed nations, YES BANK saw an opportunity to demonstrate this in a developing economy.

In a significant step, YES BANK issued India's first ever green bond (rated AA+ by CARE). It was one of the first among emerging economies. It raised $160 million (INR 1000 crore), in accordance with Green Bond Principles in February 2015.

This was originally intended to be $80 million plus greenshoe option, but it witnessed strong demand from leading investors including insurance companies, pension & provident funds, foreign portfolio investors, new pension schemes and mutual funds, causing it to be increased in size.

The launch of the first green bond in India was a cumulative effect of the bank's proactive approach towards growing its loan book in positive impact sectors to meet its commitment to invest in 500MW annually. This was revised later to a 5000MW commitment over five years starting in February 2015 (announced during the UN Climate Summit in September 2014).

An in-depth understanding of the risks involved in the sector (as YES BANK has been active since 2005 and was one of the earlier six banks that had exposure to renewable energy), and an ethos of responsible banking with a strong 360 degree framework on ESG led the bank to adopt the Green Bonds Principles.

The trigger behind YES BANK's successful issuance of its first green bond was to support the mammoth renewable energy target taken by Government of India, by providing access to domestic and foreign capital as well as better financing terms, including lower interest rates with longer lending terms.

To help power companies raise capital, YES BANK, in an innovative deal, underwrote partially-guaranteed bonds of $56 million (INR 380 crore) on a private placement basis. First loss was to be taken by India Infrastructure Finance Company Ltd (IIFCL), with an irrevocable back-stop guarantee with the Asian Development Bank.

YES BANK's foray into the green bond market had many benefits that resulted in both internal and external action. Following YES BANK's first issuance, 14 more issuances in India followed, thus creating a market towards green financing.

The Securities and Exchange Board of India (SEBI), the regulator for the securities market in India, sensing market readiness, announced disclosure requirements for issuance and listing of Green Bonds in India focussing on use of proceeds, project evaluation and selection, management of proceeds and reporting on the use of proceeds. This has marked a significant change in the green finance space in India.

Following YES BANK's issue, International Finance Corporation (IFC, Washington - part of the World Bank Group) raised about INR 315 crore on the London Stock Exchange in August 2015, that was privately placed in YES BANK's green bond as a part of its Green Masala Bond programme.

This mix of issuance and strategic investment from a development bank is an example of how development banks can use their AAA ratings to raise cheap funds from mainstream investors.

The amount raised through these issues was used by YES BANK to finance renewable energy projects (mainly wind and solar projects) in India, and pass on the lower cost of capital to emerging domestic issues who would otherwise have to pay a lot more.

IFC de-risked YES BANK's green bond investment for mainstream investors. KPMG, India provided the assurance services on the use of proceeds in accordance with the Green Bond Principles.

YES BANK believes that financing and delivering the much-needed green transformation for India requires financial innovation and intervention from all the stakeholders who impact the Green Finance ecosystem.

Market reforms should embrace sustainable development, and vice versa, as a sustainable capital markets strategy for development of a corporate bond market. A focus on green bonds will be critical.

As asset management incentive structures historically may have been skewed towards selecting assets with short-term returns rather than long-term environmental and societal impact, it is of importance that investors be incentivised to target and subscribe to responsible investments.

On the demand side, to create pull forces, regulators are bound to play an important role levelling the playing field for responsible investments. While private institutions would be critical game-changers, public finance will need to be further aligned with the Sustainable Development Goals and climate action.

Further, to bridge the climate finance gap, there is need to deploy green finance through actions like climate finance by facilitating credit enhancement (such as credit guarantees), blended finance, and a carve-out for reducing high hedging costs.

YES BANK recognises that mobilising green capital is inevitable to move to a low-carbon economy and has taken many industry-first actions, such as the IIFCL-ADB backed credit enhancement.

YES BANK will also raise INR330 crore (approximately $50 million equivalent) through an issue of a 7-year 'Green Infrastructure Bond' to FMO, the Dutch Development Bank, on a private placement basis.

FMO will invest in the bonds through FMO's own sustainability bonds.

The definitive agreement was signed on 26 September 2016 at the fourth edition of FMO's Future of Finance conference held in Katwijk, The Netherlands.

This is FMO's first investment in a Green Infrastructure Bonds issued by a bank in India. The amount raised will be used by YES BANK to finance green infrastructure including solar and wind projects in the renewable energy space.

This issuance will be externally assured by a well-reputed third party and an external annual review and monitoring will be undertaken on whether the use of proceeds is in line with the Green Bond Principles 2016.

Since the issuance of the first Green Bond in India by YES BANK, the current market dynamics have witnessed significant changes such as more transparent and accountable issuances in the market that are now able to engage with third party assurance providers.

There has been a defined and multiplied interest of the regulators and policy makers in India to enhance the ability of financial systems to mobilise private green investment.

YES BANK, as one of India's youngest and fastest growing banks, strives to be part of India's growth story and has adapted a strategic approach to sustainability to fulfil its role as a financial institution by embedding wider economic, social and environmental objectives.

Since inception, YES BANK has adopted a responsible banking ethos to link sustainable development with stakeholder value creation.

A well-structured environmental and social governance framework is integrated within the bank's credit risk policies which includes an assessment of overall projects in stages. This helps the bank mitigate risks of portfolios, resulting in a healthy bottom line, and steep growth.

Given growing investor interest in green bonds and with ratification of the Paris Agreement, further focused efforts on green capitalism are required.

Rating agencies should consider requesting that companies voluntarily, or preferably are mandated to, submit ESG disclosures, through minimal checklists in annual reports (like annual business responsibility reports) and detailed disclosures during listing at stock exchanges.

Investors would need to consider these non financial parameters during valuation and evaluation.

Emerging sectors such as FinTech and evolving financial instruments such as green bonds can play a key role in driving green capitalism, which can help India achieve its development and climate goals by 2030. For this, social and environmental concerns need to be integrated with economic concerns.

The finance sector, which is the backbone of the economy, needs to look beyond conservative business practice, and invest in establishing successful businesses through financial innovation and by financing innovation.

YES BANK remains committed to deploying new technologies, innovate financing mechanisms and business models that culminate in commercially viable and investible opportunities.