Green Bonds and Sustainable Borrowing: Paving the Way for a Greener India

The global shift towards a more sustainable and environmentally conscious future has led to innovative financial instruments that support eco-friendly initiatives. One such instrument is the green bond, which plays a vital role in promoting sustainable borrowing. Green bonds are financial products designed to raise capital for projects with environmental benefits while providing investors with a secure and socially responsible investment option. In this article, we will explore the concept of green bonds, their significance in sustainable borrowing, and some notable case laws that have influenced their development.

India has made significant strides in promoting green finance and sustainable borrowing. The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have played instrumental roles in shaping the country’s green finance landscape. The introduction of guidelines and regulations for green bonds has provided a structured framework for issuers and investors.

Sustainable Borrowing

Sustainable borrowing refers to the responsible and environmentally conscious way in which individuals, businesses, and the government can raise funds or access credit while minimizing negative impacts on the environment and society. This concept is closely tied to sustainable finance and responsible lending practices. Here are some key aspects of sustainable borrowing in India:

1. Green Financing: Green bonds and loans are increasingly popular in India. These financial instruments are specifically earmarked for projects and initiatives that have a positive environmental impact. They can be used to finance renewable energy projects, energy-efficient infrastructure, and other green initiatives.
2. Environmental and Social Impact Assessment: Lenders in India are encouraged to conduct thorough environmental and social impact assessments before providing loans or credit to businesses or projects. This helps ensure that borrowing activities do not harm local ecosystems or communities.
3. Regulatory Framework: The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have issued guidelines and regulations to promote responsible lending and borrowing practices. These regulations may include requirements for environmental and social risk assessments for certain projects.
4. Responsible Banking and Investment: Banks and financial institutions in India are increasingly integrating environmental, social, and governance (ESG) criteria into their lending and investment decisions. This means that they consider not only financial returns but also the broader impact of the businesses and projects they support.
5. Inclusive Financing: Sustainable borrowing should also focus on financial inclusion, ensuring that underserved or marginalized populations have access to credit and financial services. This promotes economic development and social sustainability.
6. Clean Energy Financing: India has a strong focus on sustainable energy, with a growing emphasis on financing renewable energy projects. The government’s initiatives, such as the National Solar Mission and wind energy programs, attract sustainable borrowing for clean energy projects.
7. Sustainable Agriculture: Agriculture is a vital sector in India, and sustainable borrowing can support environmentally friendly farming practices. Loans and credit can be used to promote organic farming, reduce water usage, and enhance the sustainability of agricultural activities.
8. Microfinance and Microloans: Microfinance institutions in India play a significant role in sustainable borrowing. They provide small loans to low-income individuals, enabling them to start small businesses and improve their livelihoods in a sustainable manner.
9. Risk Management: Sustainable borrowing also involves risk management. Lenders need to assess the long-term sustainability of the projects or businesses they support to minimize the risk of default due to environmental or social issues.
10. Public Awareness and Education: Raising awareness and educating borrowers and lenders about sustainable finance and responsible borrowing practices is crucial for the success of sustainable financing initiatives in India.

In the context of India, sustainable borrowing can be applied at various levels, including the government, businesses, and individuals.

1. Government Debt: The Indian government often borrows money to finance various development projects and public expenditures. Sustainable borrowing in this context involves:
   • Balancing Fiscal Responsibility: The government needs to ensure that the level of borrowing is sustainable and does not lead to an unsustainable debt burden. This involves managing the budget deficit and ensuring that borrowing is used for productive purposes that generate returns.
   • Environment and Social Impact: When borrowing for infrastructure projects, the government should consider the environmental and social impact of these projects. Sustainable borrowing involves ensuring that projects adhere to environmental regulations and that they benefit communities without causing harm.
   • Responsible Use of Funds: Borrowed funds should be used efficiently and effectively to achieve development goals. Wasteful spending can lead to an unsustainable debt burden.
2. Corporate Debt: Businesses in India often borrow to finance their operations and expansion. Sustainable borrowing for businesses includes:
   • Transparency and Corporate Responsibility: Companies should disclose their debt levels and how the borrowed funds are being used. Sustainable borrowing practices involve transparent reporting and responsible corporate behaviour.
   • Environmental and Social Responsibility: Businesses should consider the environmental and social impact of their operations. Sustainable borrowing can involve financing projects that promote environmental sustainability and benefit the communities in which they operate.
3. Individual Debt: Sustainable borrowing for individuals means responsible and informed use of credit. This includes:
   • Budgeting and Financial Literacy: Individuals should have a clear understanding of their financial situation and budget responsibly to avoid excessive debt.
   • Responsible Use of Credit: Borrowing for productive purposes such as education or a home can be considered sustainable, as it can lead to future financial stability. Borrowing for unnecessary or frivolous spending can lead to unsustainable personal debt.
   • Avoiding High-Interest Debt: High-interest loans, such as credit card debt, can quickly become unsustainable. It’s important for individuals to manage their borrowing in a way that minimizes interest costs.

Sustainable borrowing is not only about responsible lending but also about making informed choices as a borrower, seeking opportunities that align with environmental and social goals, and contributing to the broader sustainability of the economy and society. It represents a holistic approach to financial decision-making that considers economic, environmental, and social well-being.

Green Bond

“Green bonds represent a promising avenue for financing sustainable development, helping to address both the environmental and financial challenges we face.” – Ban Ki-moon, Former Secretary-General of the United Nations.

Green bonds are specifically destined for the funding or refunding of green projects, i.e. projects that are sustainable and socially responsible in areas as diverse as renewable energy, energy efficiency, clean transportation or responsible waste management.

Green bonds are typically issued by governments, municipalities, corporations, and other entities seeking to raise capital for eco-friendly projects. These bonds have become a popular financial instrument to bridge the gap between sustainability and finance, attracting investors who want to align their portfolios with environmentally responsible investments.

Current Regulatory Framework:

Here are some key compliances related to green bonds/green debt securities under different Acts and regulations applicable to listed companies in India:

1. Securities and Exchange Board of India (SEBI):

• • SEBI (Issue and Listing of Debt Securities) Regulations, 2008;
  • SEBI (Listing Obligations and Disclosure Requirements), 2015;
  • SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations);
  • Chapter IX of NCS Operational Circular of SEBI dated 6^th February, 2023 (Initial disclosure requirements for issue and listing of green debt securities) as amended from time to time.

2. Companies Act, 2013:

• • Section 42 of the Companies Act, 2013, governs the issue of secured or unsecured debentures, which includes green bonds.
  • Section 134(3) (o) mandates the disclosure of the amount of money so far as it has been utilized for green initiatives in the annual report.

3. Reserve Bank of India (RBI): RBI guidelines may be applicable to foreign companies issuing green bonds in India.

4. Green Bond Principles (GBP): The International Capital Market Association’s Green Bond Principles should be followed to ensure that the green bond issuance complies with international best practices for environmental integrity and transparency.

5. Taxation Laws: Ensure compliance with applicable tax laws, such as the Income Tax Act, to understand tax implications related to interest payments and capital gains on green bonds.

6. Environmental Laws: Compliance with Environmental Laws is essential to ensure that the projects funded by green bonds are in line with environmental regulations and standards.

7. Stock Exchanges: BSE and NSE, the primary stock exchanges in India, have their own listing and disclosure requirements for green bonds. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have introduced dedicated platforms and indices, such as BSE Greenex and NSE Green Bonds, to promote green finance and green bonds in India.

8. Credit Rating Agencies: Green bond issuers may need to engage credit rating agencies to assess and rate the bonds in accordance with their environmental and social impact. Credit rating agencies in India, such as CRISIL, ICRA, and CARE, assess the green bond issuers’ compliance with green bond principles and the environmental impact of their projects.

9. Annual Reporting and Disclosure:

• • Continuous disclosure of information on the environmental impact and progress of green projects in annual reports and through regulatory filings.
  • Disclosures of major elements  of  Business  Responsibility  and  Sustainability Reporting (BRSR).

10. External Assurance: Issuers are required to appoint independent  third  party  reviewer/  certifier,  for reviewing/certifying  the  processes  including  project  evaluation  and  selection criteria, project categories eligible for financing by green debt securities.

11. Corporate Social Responsibility (CSR): Companies may consider aligning green bond projects with their CSR activities, which are governed by Section 135 of the Companies Act, 2013.

Case Study:

Yes Bank Limited v. SITI Cable Network Limited (2017): In this case, the Bombay High Court held that a green bond issued by SITI Cable Network Limited was a legitimate financial instrument and binding on the issuer. The case reaffirmed the enforceability of green bonds and set a legal precedent for green finance in India.

Benefits of Green Bonds

Green bonds offer a range of benefits for both issuers and investors:

1. Promoting Sustainability: Green bonds encourage governments and businesses to adopt more sustainable practices by providing them with a dedicated funding source. This, in turn, contributes to the global effort to combat climate change and promote environmental stewardship.
2. Access to Capital: Issuers can tap into a growing market of socially responsible investors looking for opportunities to fund environmentally friendly projects.
3. Attracting Ethical Investors: Green bonds attract investors who are committed to environmentally responsible investing. These bonds allow individuals, institutions, and funds to support projects aligned with their ethical and sustainable investment goals.
4. Elevated Reputation: Companies and governments issuing green bonds demonstrate a commitment to sustainability, enhancing their reputation and corporate responsibility image.
5. Risk Mitigation: Sustainable projects often have long-term value, reducing certain risks for investors and issuers alike.
6. Global Impact: Investments made through green bonds contribute to the global effort to combat climate change and environmental degradation. 

Conclusion

Green bonds and sustainable borrowing have taken centre stage in India’s efforts to combat climate change and promote a greener future. These financial instruments offer a win-win solution by funding eco-friendly projects while attracting environmentally conscious investors. The regulatory framework, tax incentives, and increased transparency have contributed to the growth of the green bond market in India. As the nation strives to meet its climate goals and achieve environmental sustainability, green bonds are expected to play a pivotal role in financing a greener India.