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Investment Banking | June 16
What is Sustainable Finance and Green Bonds?

Sustainable finance is a practice of integrating environmental, social, and governance (ESG) criteria into investment decisions. Such decisions support the UN goals of Sustainable developments, particularly to battle climate change. These activities make companies look for and invest in alternative sources of energy, technology for a cleaner future. Such investments are marked on a scale of Principles of Responsible Investments (PRI). Corporate green bonds are effective; they not only yield improvements in companies’ environmental footprint but also contribute to financial performance. Moreover, they help attract an investor base that values the long run and the natural environment. The lending practices and policies of Banks and FIs should inculcate ESG criteria into their risk assessment. Globally such practices are gaining traction.

Sustainable Finance is instrumental in responsibly modernizing the global economy that is progressing swiftly. The idea is to reshape finance, according to the pressing, collective needs of the society, which can ultimately lead to creating an inclusive and integrated world where no one is left behind. These investments also raise awareness among investment banks and keep in mind many principles like the Equator Principles guiding sustainable investments. With the rise in popularity of green bonds, i.e., fixed income instruments raising money for a sustainable environment. These bonds have an increasing market for facilitating investors to channel their money towards cleaner tech and having larger social benefits rather than a skewed capitalist mindset. Common investments include solar power plants, wind farms, agricultural enterprises, etc. Green bonds not only provide alternative capital for the corporates but also help keep their environmental clearances in check- as climate change is gaining unprecedented importance. Across jurisdictions, it is mandatory under both global and local laws to publicly disclose greenhouse emissions, carbon profiles, etc. For many of the companies engaged in the manufacturing sector, green bonds could help in running their production in eco-friendly and manage and improve upon their environmental credentials.

The Green Bond Market faces challenges in innovation as the Indian bond market is marked by a lack of volume and depth but does not present enough opportunities in mobilizing long-term debts. Emerging sectors for investments include green buildings, smart cities, clean energy, and agriculture. Standards of such infrastructures vary across jurisdictions proving as the major obstacle in opening up this market. Incentivising schemes for attracting investments are missing from the present Indian Landscape, only schemes available only to energy providing companies. Limited knowledge and domestic expertise also deter many such sustainable investments

France, China remains the top destinations in Global Green Bond Markets and their domestic markets are providing a variety of market instruments in diversified sectors. Also, in these jurisdictions Municipal Bonds are a major source of investment vehicles, however, this area remains untapped. Large cosmopolitan cities are the only ones interested enough to raise finance from the capital markets, but other urban centers still depend on traditional sources like tax and government funds to cater to their needs. Investment companies/hedge funds can easily expand such an opportunity by agreeing to raise funds on behalf of these local bodies, easing the norms and offering them at a fair market price.

As India remains a popular investment destination for foreign investors owing to favorable government mandates and make in India schemes etc. its green bond market stood at $10.3 Billion in 2019. Many state corporations have entered the green bond market and raised a heavy amount. SEBI has continuously aided in promoting this market to increase energy access across communities and also has disclosure requirements based on Green Bond Principles, 2015. These valuations and disclosures are not one-sided favouring the environment but are assessed fairly on financial and economic viability. Although, green bonds don’t offer the highest returns but yield fixed returns, and since not all profits are quantifiable, these acts asa significant source for increasing investor portfolios and can provide major tax reliefs as well.

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