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An Interview with Vijay Yadav: On Green Bonds, Shareholder Activism and the Importance of ESG Investing

Founder and CEO, Transfin.
Jul 31, 2021 3:25 AM 10 min read

We speak with Prof Vijay Yadav – Associate Professor, Department of Finance, ESSEC Business School, Asia-Pacific Campus - on the rising significance of green investments in India and other countries.

Specifically, on how shareholder activism and green bonds - among other tools - can be used by companies and shareholders (and encouraged by governments and central banks) to encourage robust ESG investing.


Q. What are the drivers behind the rising importance of green investments? What are the opportunities you see in Asia in general and India in particular?  

Prof Yadav:

Green investments are investments that focus on environment friendly projects. These projects may be in the areas of development of renewable energy, conservation of natural resources, clean air and water, sustainable agriculture, or green buildings. 

Asian economies are growing fast and therefore green investments assume great importance for the governments, corporations, and individuals in Asia. A large part of the Asian population is dependent on electricity produced from coal. In India, around two-third of electricity is produced from coal, which is a measure source of carbon emissions and air and water pollution. Moreover, a significant part of population does not have access to electricity. As the economies develop and the demand for electricity from corporations and households increases, it will be become even more important to develop renewable sources of energy to reduce carbon emissions and control pollution. Moreover, the process of industrialisation results in deforestation on a big scale. Governments should take action to minimise the scale of net deforestation by adopting policies to replenish the lost forests so that there is no net deforestation due to setting up of new industries.

All countries want to achieve high growth rate so that they can improve the living standards of their citizens. Unfortunately, the aspirations of countries for rapid development are often in conflict with environmental goals. It is a quite challenging issue for all countries but more so for developing countries like India where the demand for things like electricity and clean drinking water is likely to increase significantly. Therefore, it is important for the governments in developing countries to adopt policies that will minimise the impact of rapid growth on environment. This will require huge investments in green energy projects.

Green investments can play a significant role by providing capital to corporations for investments in renewable energy projects and development of green technologies. The US, China and France are leaders in the issuance of green bonds, but other countries are also catching up. In India, there have been some green bond issues. For example, Adani Green Energy and its subsidiary companies have issued green bonds to invest in solar energy projects in many states in India. 

Since bond markets are less developed in India and banks play a more significant role in lending to corporates, the Government and the Reserve Bank of India may adopt policies to encourage banks to lend to environment-friendly projects. The scheduled commercial banks and foreign banks with more than 20 branches in India are required to have at least 40% of adjusted net bank credit in priority sector lending. One of the categories of priority sector lending is renewable energy which includes loans for purposes like solar based power generators, biomass based power generators, wind mills and energy efficient street lighting systems. It might be a good idea to require these banks to allocate some fraction, say 5%, of total lending exclusively to renewable energy sector. Currently, banks’ lending to renewable energy sectoris less than 1% of their total lending.

We should note that India is the third biggest emitter of greenhouse gases in the world, behind only China and the US. However, due to its large population, its per capita emission is very low – less than half of the world average. India ratified the Paris Agreement in 2016 and made commitments to adopt environment friendly policies in its economic development plans.


Q. What is ESG investing and how does it sit within the broader green investment narrative? 

Prof Yadav

ESG refers to the environmental, social, and governance practices of a company. The three components of ESG together may define the long-term growth strategy of a company. For example, consider a car company. The environmental aspect of ESG may mean development of electric vehicles to reduce carbon emissions. The social aspect of ESG means that the company will take actions to support weaker sections of society by providing opportunities to them within the company as well as supporting other organisations working for social justice, human rights, and eradication of child labor. The governance aspect refers to things like business ethics, transparent reporting, shareholder rights, independent and inclusive board, and executive pay.

Green investment refers to investment in projects that have objectives like helping the environment by reducing pollution, providing clean air and water, development of renewable sources of energy, conservation of forests, and reducing carbon emissions. Therefore, green investments are most closely related to the environmental aspect of ESG.

Green investment is mostly financed by green bonds. Corporates, governments as well as organisations like the World Bank have issued green bonds. Green bonds by corporations were almost non-existent ten years ago. Issuances of green bonds by corporations have been increasing but still represent only a small fraction of their total bond issuances.

Let us look at some examples. Toyota Financial Services (TFS) issued the auto industry’s first green bond in 2014. The company has issued several green bonds since then. In June 2021, TFS issued the sixth green bond to raise $1.6bn to finance the sale of environmentally friendly vehicles. This takes the cumulative total of green bonds issued by the company to $7.6bn.

Apple issued $1.5bn green bonds in 2016, $1bn green bonds in 2017 and $2.2bn green bonds in 2019. In 2020, the company used the proceed from green bonds to fund 17 projects with the aim of producing clean energy and reducing carbon emissions. Apple has pledged that every Apple device sold by the company will have zero climate impact by the year 2030.

International organisations have also helped raise money for environmental projects by issuing green bonds. For example, the World Bank has issued more than 185 green bonds in 23 currencies since 2008 to raise approximately $16bn equivalent amount to finance projects in several countries that address the issue of climate change.


Q. India hasn’t seen any climate change-driven shareholder activism yet (e.g. Exxon Mobil) or any shareholder activism for that matter – is it a function of promoter family-led ownership structures or nascency of the market at large? 

Prof Yadav:

Shareholder activism can take two different forms. The first kind of activism involves shareholders “voting with their feet”, i.e. selling all their shares in the company if they are dissatisfied by the company’s management. The other kind of activism involves shareholders raising their “voice” by taking direct action against the management to force changes in the strategy and governance of the company. When we talk about shareholder activism, we are generally referring to the second kind of activism in which activist shareholders goal is to increase shareholder value. The demands of activist shareholders often involve increase in dividends, share buybacks, change in capital structure, change in board composition, mergers and acquisitions, or divestments. 

In recent times, there has been a rising trend of activist shareholders demanding the company to adopt environmentally friendly policies. An interesting case is the efforts of activist shareholders in Exxon. Engine No. 1, an activist hedge fund, was able to install three of its nominees in twelve-member board of Exxon in elections held in May 2021. Although Engine No. 1 holds only 0.02% of Exxon’s shares, it received support from some large investment funds including BlackRock, Vanguard and State Street. The goal of these activist investors is to implement a strategic plan that will significantly increase investments in clean energy and reduce emissions.

Shareholder activism has a long history in the USA. However, this was the first case of shareholder activism on such a large scale for ESG related objectives. Around the same time, Chevron and ConocoPhillips also witnessed majority shareholders voting for emissions-cutting proposals. This may be the beginning of a new era in shareholder activism where shareholders force companies to take actions to protect environment. Such activism is not only socially responsible but may be profitable for shareholders because the investments in clean energy today may create shareholder value in the long run.

The Bombay Stock Exchange (BSE) is Asia’s oldest stock exchange. Yet, shareholder activism in India is still in its early stages and shareholder activism on environmental issues is almost non-existent. The activists in India have been mostly focused on the governance aspects of companies involving issues like executive pay, board independence, related party transactions, mergers and divestments. With the right regulations in place, and increased awareness among the shareholders, it is inevitable that shareholder activism will continue to grow in India. Regulators can play an active role in enabling shareholders to raise their voice. For example, facilitation of e-voting by shareholders in a simple and secure way is a step in the right direction by SEBI as it will lead to higher shareholder participation.


Q. Major Indian businesses (Reliance, Adani, Tata) are making ambitious green investment pledges – what is your take on them? Do you see real commitment?

Prof Yadav:

We should remember that the main objective of activist investors is creation of shareholder value. Even in the case of shareholder activism in Exxon, the stated objective of activist hedge fund Engine No 1 was “long-term sustainable value creation” that it aimed to achieve “by putting the Company on a path to net zero total emissions by 2050”. 

Any company that plans to invest in green projects will evaluate these projects just like any other project. The cost-benefit considerations may be different in case of green projects but the profit motive cannot be totally ignored. There has been an Increasing awareness in the Indian corporate world on the impact of their investments on environment. Several India companies have made progress towards investments in green projects. However, issuance of green bonds in India is still in its nascent stage. Green bonds constitute less than one percent of total bonds issued by corporations in India. We should hope that the environmental issues will become more important in investment decisions of Indian companies in future. Government and regulators can also play an important role here by creating incentives for Indian companies to invest in green projects.  


Q. What are the trends and challenges here? What kind of incentives can be presented by policy makers? Any precedents?   

Prof Yadav

A big challenge in ESG investing is the phenomenon of greenwashing. It refers to the fact that companies may resort to misleading representation of their investments to portray themselves as more environment friendly. In turn, investment companies may also incorrectly claim to be ESG funds because their portfolio holdings may not be correctly categorised.

ESG investing is becoming popular in the fund industry all over the world fueled by increasing demand for such funds. However, since ESG concept is not very well defined, there is a concern that many funds are rebranding themselves as ESG funds while still investing in companies that are among the world’s largest carbon emitters. ESG funds have performed very well in recent years, often outperforming the conventional funds. Strong financial performance of these funds has attracted huge amount of cash from investors thereby further incentivising the fund companies to launch new ESG funds. 

Regulation can play a big role in preventing greenwashing. The funds should be required to disclose more details about their portfolios so that investors can make an informed decision regarding the extent to which a fund invests in ESG products. Prevention of greenwashing is necessary to ensure that investor money flows through ESG funds to companies that invest in genuine sustainable projects.

The increasing demand for ESG products from investors and the consequent proliferation of ESG funds to serve these investors may pose another kind of challenge – mispricing of assets and creation of bubbles in the financial markets. Since the total amount of ESG assets may not be enough to satisfy the growing demand from investors, it is possible that the excess demand may lead to overpricing of ESG assets. In the short run this will result in high profits for ESG investors. The risk is that when the mispricing is corrected in the market resulting in losses for some investors, these investors may exit the market for ESG products and new investors may be scared to enter this market. This may lead to a shortage of capital for ESG projects in future.

How can governments incentivise investing in ESG or green projects? Governments may give tax breaks to investors who buy green bonds. This will increase the demand for green bonds in countries where returns on conventional bonds are taxable. Another policy to incentivise green bonds might be to require banks to allocate a certain fraction of their total lending to environmentally-friendly projects.

In Bangladesh, banks are required to allocate at least 5% of their lending to renewable energy sector. Governments may also require corporates to allocate a fraction of their profits to invest in green projects.

Governments or central banks can also play a direct role to encourage green investing. In Singapore, the Monetary Authority of Singapore (MAS) set up the Green Investment Programme (GIP) in 2019 to promote sustainable investments. Under this programme, MAS will place $1.8bn with five asset managers to invest in climate related equity and fixed-income investment opportunities.

The Bank for International Settlements (BIS) has launched two open-ended funds, first in 2019 and second in 2021, for green bond investments by central banks and official institutions. Together, these two funds manage about $2bn in green bonds for central banks. It is expected that BIS will launch more such funds and the assets under management of these funds will continue to grow.    

The US Fed and the ECB have launched massive asset buying programs as part of their quantitative easing programs. Although the current objective of these programs is to support the economy, the central banks can support green financing by skewing asset purchases towards green bonds. Central banks in all countries have the potential to support green investments by become big investors in green bonds.

An interesting part of green investments is the debt-to-nature swap agreements. The US has signed such debt swap agreements with several countries under which the US agrees to convert its debt to the borrower country into a fund that the borrower country will use in projects to protect the environment. For example, in 2009, the US had signed an agreement with Indonesia to convert nearly $30m of Indonesian debt into a fund. Under the terms of the agreement, Indonesia will not have to pay back the debt to the US but it will have to use the money to protect forests on Sumatra Island. Similarly, in 2010, the US and Brazil signed an agreement to convert $21m of Brazilian debt into a fund that Brazil will use to conserve its Atlantic coastal rainforest, and Cerrado and Caatinga ecosystems. The US has signed similar debt-for-nature swap agreements with many other countries.


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