An explosion in green bonds offers emerging economies, such as India and China, easier ways to finance clean-energy projects.

According to the London-based Climate Action Programme, recent growth in such bonds worldwide will continue. The organization projects a tripling in the size of the green-bonds market, from $37 billion in 2014 to $100 billion in 2015.

In February, Yes Bank issued India’s first green bond, worth 10 billion rupees ($160 million), to finance infrastructure that includes solar power, wind power, biomass and small hydroelectric projects. The issuance could help the country meet Prime Minister Narendra Modi’s goal of moving from 34 gigawatts of renewable-power capacity today to 175 gigawatts by 2022.

Prime Minister Narendra Modi has set a goal of increasing India’s solar power capacity to 175 gigawatts by 2022. (© AP Images)

In addition to banks, corporations and cities are issuing green bonds. In 2014, Johannesburg, South Africa, became the first city in an emerging-market country to show how green bonds can pay for clean-energy projects in such places.

Renewable energy is not just good for the environment. Investing in solar, wind and other clean-energy technologies can lower energy costs and spur economic activity.

Traditional loans versus bonds

Financing renewable energy has not been easy in some developing countries. The cost, or interest rate, of commercial loans has been a barrier, especially for companies in emerging markets such as India.

“The higher cost and inferior terms of debt in India may raise the cost of renewable energy by 24–32 percent compared to similar projects financed in the U.S. or Europe,” says a study by the Climate Policy Initiative and the Indian School of Business. In countries like India, shorter loan durations and variable interest rates add to the cost of renewable energy projects.

Green bonds offer a solution. Like regular bonds, they are issued to raise capital from wealthy individuals and other investors. However, the proceeds must go to projects with environmental benefits. Beyond that, there are no rules or standards for green bonds.

What makes green bonds an attractive source of financing is their pricing. The recent demand among investors for financial vehicles tied to sustainable-energy projects means that those issuing green bonds can pay out lower interest rates than they would pay to use other financing methods.