Green Bonds emerging as a financial tool for environmentally sustainable projects in India

1. Introduction

From the beginning of the Stockholm conference in 1972, for the protection of the environment, global cooperation and coordination can be witnessed throughout various conferences of parties, bilateral and multilateral agreements & incorporation of international environmental standards in municipal legislations. India is no exception to global environment practice.

Financial institutions are becoming more and more acknowledged for their participation in this area as a means of atoning for what is thought to be environmental neglect. Fossil fuels continue to dominate global energy investment, posing a threat to the development of green energy to achieve climate and clean air goals. This, along with the unwillingness of some developed and developing economies to abandon pro-coal policies, keeps the objectives of reducing CO2 emissions at odds. Financial institutions are essential for any kind of infrastructure project, and they tend to favor traditional energy because new technologies come with several hazards in addition to having poor initial rates of return.

Investments worth trillions of dollars are required to address the worldwide environmental catastrophe. There are green bonds, a mechanism for issuers to generate money exclusively for eco-friendly initiatives like clean energy or transportation. The market, which began slowly more than ten years ago, has had growth in recent years, which has encouraged the creation of further socially responsible loan products. Regulators are developing criteria to prevent greenwashing, or false statements about how environmentally friendly an issuer is, because it may be difficult for investors to determine if a project is green.

To use the revenues for ecologically friendly initiatives, green bonds are debt instruments that can be offered by any sovereign authority, intergovernmental organizations, local bodies, the private sector, or multilateral institutions (such as the World Bank). However, the Securities and Exchange Board of India points out that a green bond issuance differs in that the proceeds are reserved for funding green initiatives (SEBI). Generally speaking, it is given to fund initiatives including clean public transit, sustainable water and wastewater management, renewable energy and energy efficiency projects, pollution prevention and control, conservation, and green buildings. In general, green bond initiatives aim to provide tangible, significant net benefits for the environment or climate. Projects that are not largely concerned with the climate often improve environmental quality, support sustainable living, and/or conserve natural resources while also managing them sustainably and effectively.[1]

2.  The advent of Green Bonds

Green bonds were first released by the European Investment Bank in 2007, nearly 15 years ago. As a result, the World Bank started issuing green bonds in 2008 to support its financing efforts for projects connected to climate change. The significance of green bonds became increasingly apparent with the introduction and growth of ESG (Environment, Social, and Governance) and Sustainability Framework in the investment reporting framework. As a result, the International Capital Market Association developed the Green Bonds Principles (GBP), which emphasized openness, disclosure, and integrity in the growth of the green bond market.

In response to a request by a collection of Swedish pension funds looking to participate in climate change initiatives, the World Bank offered its first green bond in November 2008, k known as the first green bond in history, it served as a model for the current green bond market by giving investors ways to assist climate remedies with their capital without compromising financial gains. Since then, green bonds have drawn a lot of attention from investors across the world.[2]

3. The regulatory regime in India

Companies in India may issue green debt instruments in both unlisted and listed formats. While there are no extra restrictions beyond the normal requirements for debt securities issuance for unlisted green debt securities, issuances of listed green debt securities must adhere to the additional requirements under the following regulations-[3]

4. Some of the notable ones are

The ecological goals of the issuance of green debt securities are stated:[4]

• brief information to be taken into account by the issuer when deciding whether the project is eligible for funding through the issuing of Green Debt Instruments. The standards for using the proceeds from the planned issuance to finance the eligible green projects and the sustainable environmental goals of the funding must be included. These must be followed in determining whether the project fits into any of the classifications of green projects listed under the interpretation of Green Debt Securities.
• specifics on the methods used to monitor the distribution of the revenues;
• specifics about how the issuer plans to use the money raised from the potential issuing of green debt securities, including initiatives, assets, and regions. Included in the specifics should be whether the money is being collected to refinance already-existing initiatives or assets;
• Specifics of the independent third-party reviewer/certifier that the issuer has chosen to review and certify the processes, such as the project evaluation and selection standards, the project categories that qualify for financing by Green Debt Securities, etc., should be provided if they have been appointed. Such a meeting is optional, but if made, the offer paper requires that all relevant statements be made.
• financial outcomes on a quarterly and monthly basis, as well as information on how the profits from the sale of green debt securities were used and, if any, how much money was left over. The use of profits must be supported by a report from an outside investigator.
• environmental effects that are both intuitive and quantitative. If the quantifiable benefits or impact cannot be determined, the required statements in this respect must be made, along with the reasons why the benefits or impact on the environment cannot be determined.

5. The Indian Market

Funding programs that will help the economy’s carbon impact be reduced is the main objective of green bonds. Industry experts have hailed this action as being urgently necessary, particularly in light of Prime Minister Narendra Modi’s target of a 45% reduction in India’s carbon emissions by 2030. Sovereign green bonds have been released with long-term tenures that are similar to those of government assets to meet the country’s demand for green infrastructure expenditures.

The dedication of India to environmental preservation is outlined in Article 48-A of the constitution. India has laboured hard to find an equilibrium between economic growth and environmental preservation. Programs such as the National Clean Air Plan, the Namami Gange Mission, and the management of plastic garbage, E-waste Management Rules, 2022 are examples of this.

Because it is a largely tropical country, India has a more difficult time adapting to the impacts of climate change than most other emerging countries. In acknowledgment of this, the National Action Plan on Climate Change (NAPCC), which was launched in 2008 with eight strategic Objectives, was established. The NAPCC aims to accomplish growth objectives by lowering the economy’s emission density, increasing energy efficiency, extending forest cover, and establishing viable habitat standards, among other things. The National Adaptation Fund on Climate Change (NAFCC) was created in 2015 to enhance the resilience of the most susceptible people and ecosystems, with a focus on climate-sensitive sectors such as agriculture, water, forests, and coastal and Himalayan habitats.[5]

6. RBI’s pushes towards green infrastructure through an auction of Sovereign Green Bonds

The RBI vide its press release dated January 6th, 2023, announced that the Government of India would issue Sovereign Green Bonds as an initiative towards building green infrastructure. The deposits would be utilized in public sector projects & which aim to reduce the carbon footprint in the economy. The worth of the auction will be Rs. 16000 cr. which will be done in two tranches, Rs. 8000 cr. each. on January 25th, 2023 & subsequently on February 9th, 2023.[6]

The crucial Sovereign Green Bonds are

• It would be issued through Uniform Price Auction.
• 5% of the notified volume of sale has been set aside for individual investors as itemized under the ‘Scheme for Non-competitive Bidding Facility in the auction of Government of India Dated Securities and Treasury Bills’.
• It is eligible for repurchase transactions (Repo) subjected to Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018.
• SGrBs would be counted as a qualified investment for SLR (Statutory Liquidity Ratio) purposes.
• the underwriter in the auction of SGrBs by main sellers tracks the Reserve Bank’s “Revised Scheme of Underwriting Commitment and Liquidity Support.”
• SGrBs is qualified for “When Issued” trading in subjected to ‘Transactions in the When Issued market in Central Government Securities’ issued by the Reserve Bank of India vide circular dated July 24, 2018.
• SGrBs are traded in the secondary market.
• SGrBs are elected as specified securities under the ‘Fully Accessible Route’ for investment in Government Securities by non-residents.

The key takeaway from the notification is that Central Government is focusing more on green economic transition and in the upcoming days there will be more issuance of green bonds for the swift eradication of carbon emissions. Further, not limiting the foreign investment upon these specific securities through a fully accessible route shows the baby steps by our nation towards clean energy at a reasonable rate.

7. Recent Steps taken by Municipal Authorities in India

Ghaziabad Municipal Corporation- In April 2021, the Ghaziabad Municipal Corporation (GMC) have become India’s first local corporation to collect $150 million in the domestic market by issuing a green bond. GMC will use this money to build a secondary waste treatment facility, which it raised at an 8.1% coupon on a 10-year bond and floated on the Bombay Stock Exchange.[7]

• Indore Municipal Corporation- The green bond issue of the Indore Municipal Corporation (IMC) was oversubscribed 5.42 times on the first day, drawing offers worth Rs 661.52 crore. The total size of IMC’s green bond sale is Rs 244 crore, which includes a Rs 122 crore base size and an opportunity to keep oversubscription up to Rs 122 crore. The problem will be resolved on February 14, 2023. The professional and business investor categories each received Rs 229.35 crore and Rs 201.86 crore, respectively. The profits from Indore’s bond auction are expected to be used to build a 60 MW solar power facility in Madhya Pradesh’s Khargone region.[8]
• Bhopal Municipal Corporation- As part of the state government’s greater focus on renewable energy, the Bhopal Municipal Council and other local organizations in Madhya Pradesh, such as the Indore municipal body, plan to utilize green bonds. The state got investment intentions totalling more than Rs 15 trillion during the recently ended Global Investors Summit (GIS), with green energy leading the list with propositions worth Rs 6.09 trillion. In contrast, the Bhopal Municipal Corporation intends to use the money for photovoltaic and wind energy facilities, water supply, and sewage projects in the Neemuch area.[9]

8. Doing trillion-dollar deals

These developments indicate that some important parts of the sustainable finance puzzle are falling into position. However, there are still concerns about the actual integration of environmental, social, and governance (ESG) considerations into regular financial decision-making. Concerns about corporate India’s ethics have been heightened by the recent controversy surrounding the Adani group’s governance, causing some foreign investors to sell their assets. As of now, the total issuance of green, social, and sustainability bonds has been disappointing, falling far short of what is required to allow India’s energy and environmental changes.[10]

The definition of sustainable finance in terms of India’s necessities and goals has yet to be defined, making the release of the country’s taxonomy a top priority. What stands out about the upcoming taxonomy suggestions drafted by India’s Task Force on Sustainable Finance is the inclusion of social and just transition principles from the start, alongside traditional environmental funding objectives. This highlights the basic human component, which could become India’s defining contribution to global sustainable finance initiatives.[11]

Closing the long-standing green finance deficit and increasing investment to achieve the Goals by 2030, including societal objectives such as ending poverty, reducing disparity, and achieving gender equity, are India’s top two significances for the G20’s sustainable finance deliberations. There is no comprehensive estimate of how much funding India will require to make its own energy and environmental changes sustainably. However, preliminary projections from the Council on Energy, Environment, and Water (CEEW) indicate that more than $10 trillion in electricity, green hydrogen, and electric vehicles alone will be required from 2020 to achieve India’s net-zero goal year of 2070. Capital will also be required to develop resistance to climate effects, as well as to regenerate India’s soils, forests, and groundwater, among other Goals. India’s present financial structure simply cannot produce this amount of capital, a gap shared by all nations in the Global South to varying degrees.[12]

A Global Climate Alliance, as suggested by a group of specialists including Jayant Sinha, a member of India’s parliament and head of its standing finance committee, could help bridge this chasm. The Alliance could implement a package of financing efforts for net zero delivery in critical sectors, as well as for just transition and resilience, by bringing together a leadership group of industrialized and developing nations around a shared goal. Upfront public finance would be critical, with an emphasis on novel tools to address the flaws in the global financial system that prohibit long-term institutional money from flowing to the Global South.[13]

India could also make bilateral sustainable finance agreements that are ambitious and technical. An India-UK sustainable finance agreement, for example, could commit the UK to channel $1 trillion in finance for India’s transformation through 2050 and beyond, using a blend of grant, concessional, and private capital, with the latter accounting for the overwhelming majority of such a partnership. As part of the agreement, the best minds in the City of London and Mumbai’s Dalal Street could be tasked with figuring out how to pass on the UK’s lower cost of capital to Indian sustainable investments, as well as how to break down the bottlenecks in both countries that prevent banks and investors from developing strategic allotments to India’s transition.[14]

To be effective, both parties must have a stake in the outcome. This could be accomplished by leveraging models such as India’s National Infrastructure Investment Fund, which has effectively collaborated with the UK on several renewable and green development deals. Of course, such an agreement would not be exclusive. However, it may help to lift the international community out of its low-ambition rut when it comes to sustainable funding for crucial countries like India.[15]

9. Making its Mark

The secret to sustainable finance is said to be incorporating ESG elements into every commodity and organization. However, this noble aim presupposes that today’s financial mainstream is fit for purpose. The truth is that significant system failures exist, implying that capital is fundamentally mismanaged into investments that may jeopardize both natural security and social equity, as well as deprive the Global South of much-needed finance. Far better to strive for financial system change, which countries identified as critical at last year’s climate conference in Cairo.[16]

In the past, India has frequently adopted international sustainable finance standards, ranging from investment protections to reporting systems. This G20 year marks India’s transition to a sustainable finance provider on two fronts: aligning its domestic system with the country’s climate and sustainable development objectives, and spurring the global changes that are now sorely required.[17]

10. Conclusion

In conclusion, green bonds are emerging as an attractive financing tool for environmentally sustainable projects in India. The country has shown significant progress in the issuance of green bonds, and it is ranked as the fourth-largest issuer of green bonds globally. With a target of achieving 450 GW of renewable energy capacity by 2030, India requires significant investments in the sector, and green bonds provide an excellent opportunity to finance these projects. The government’s tax incentives and SEBI’s guidelines for green bonds have also helped to create a supportive environment for the growth of this market. As India continues to prioritize sustainable development and renewable energy, the future for green bonds in the country looks bright.[18]