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India faces significant challenges in the need to balance rapid growth with poverty alleviation alongside environmental initiatives. India’s robust green bond market could significantly finance the country’s ambitious Nationally Determined Contributions (NDCs) to the Paris Agreement.
Green Bonds and the Outlook for Green Bonds in India
Green bonds and traditional bonds work similarly, except that proceeds from green bonds can only be used to finance climate adaptation and mitigation projects. The International Capital Markets Association (ICMA) Green Bond Principles outline eligible projects to be financed by green bonds. In India, SEBI issued green bond guidelines in 2017 and the government developed a sovereign green bond framework in 2023. Both are consistent with ICMA international guidelines. On January 25, 2023, India issued the first tranche of sovereign bonds worth Rs 80 billion, followed by a similar issuance on February 9. This marks an important turning point in the country’s efforts to expand renewable energy production and reduce carbon intensity.
In India, SEBI issued green bond guidelines in 2017 and the government developed a sovereign green bond framework in 2023. Both are consistent with ICMA international guidelines.
Recently, the Reserve Bank of India (RBI) opened the door to foreign investment in sovereign green bonds. This introduction increases the number of potential investors. Broadening the investor base could improve the liquidity of green bonds, making them more attractive to domestic and foreign investors.
Corporate green bonds account for the majority of domestic issuance. India’s green bond issuance totaled USD 21 billion as of February 2023, of which the private sector accounted for 84%. Sovereign and government agencies accounted for 14% of total issuance in February 2023, indicating a wide gap in public and private capacity. The recent emergence of the sovereign green bond market means that the particular framework is relatively undeveloped. In addition, private companies can adjust and adjust projects to suit the interests of investors. This flexibility makes private companies a more attractive investment option. These investments focus on three main areas: In renewable energy, bonds are issued to finance solar, wind, and hydropower projects. Additionally, green bond investments are being made in the development of energy efficient projects and technologies across a variety of sectors. Finally, green bond proceeds will be used for sustainable transportation projects such as electric vehicles, public transportation, and related infrastructure. These projects further demonstrate the public and private sector’s determination to move towards sustainable practices without compromising economic growth.
Green bond investments are made in the development of energy efficient projects and technologies across a variety of sectors.
Although municipal issuance currently accounts for just 0.1% of green bond issuance in India, it has huge potential. Vadodara Municipal Corporation in Gujarat became the first city in Asia to issue certified green municipal bonds in 2023. Additionally, Indore Municipal Corporation issued its first green bond in February 2023 for the installation and operation of a 60 MW solar power plant. The civic body’s green bond was oversubscribed by 5.90 times, raising Rs 720 million instead of the planned Rs 244 million.
Key challenges and areas for improvement
Despite these efforts to steer India in the right direction, certain concerns remain. India’s total green bonds of $21 billion will account for only 2.2% of global issuance in 2023, despite its large economy and large emissions. Of this, sovereign green bonds aim to raise approximately USD 1.94 billion (Rs. 16,000 crore) in 2023 and USD 2.44 billion (Rs. 20,000 crore) in 2024.
A business culture focused on sustainability
Governments need to look to structural changes to increase sovereign issuance. In April, the Reserve Bank of India (RBI) did not accept bids for the year’s first sovereign green bond auction. Bond traders speculated that the decision was due to investors’ reluctance to pay the premium (‘greenium’) typically associated with green bonds. Investors around the world are usually willing to accept lower returns on green bonds because the funds raised are aimed at environmentally friendly purposes.
Strong public-private connections in sustainable finance are helping issuers and investors find common ground.
The success of Scandinavian countries in building an investor base can be attributed to a strong business culture that prioritizes sustainability-oriented investments. In Sweden, for example, companies are required to pay attention to sustainability. These companies are encouraged to invest in green bonds to finance their climate efforts. Additionally, strong public-private connections in sustainable finance are helping issuers and investors find common ground. Similarly, to develop the green bond market, the Indian government needs to raise awareness and encourage a sustainability-oriented business culture. The Business Responsibility and Sustainability Reporting (BRSR) guidelines established by SEBI in 2021 require listed companies to disclose their sustainability performance based on several different indicators. This step is important in assessing and encouraging companies to prioritize sustainability and build a business culture around it. This top-down approach will encourage more issuers to enter the green bond market and develop a more favorable market for investors.
Increased transparency and visibility
Another challenge in the uptake of India’s green bond market is the lack of transparency, visibility and communication. Increasing transparency is important for building investor-issuer relationships. Currently, limited human and technical resources impede robust reporting and verification processes, thereby limiting investor confidence. Having said that, the recent release of the Sovereign Debt Framework by SEBI mandates transparency in green bond issuance and strengthens external review mechanisms as part of the green bond issuance process. Therefore, transparency issues are likely to belong to the implementation level rather than the policy level.
Greater transparency in green bond issuance and capital allocation will make investors more likely to feel confident in their decisions, creating greater demand for green bonds from the bottom up.
Brazil’s growing market is the region’s largest corporate green bond issuer and has achieved remarkable success among its broad and growing investor base. This success can be attributed to a transparent green bond framework that establishes green bond classification by defining processes for selection of eligible expenses, bond monitoring and measurement, and external verification. Reflecting this, India may develop a green bond taxonomy to help implement transparency measures outlined in the SEBI framework. By increasing the transparency of green bond issuance and capital allocation, investors are more likely to feel confident in their decisions, thereby creating greater demand for green bonds from the bottom up.
Focus on developing green bonds at the municipal level
Greater focus on municipal-level green bonds could accelerate climate adaptation and mitigation programs. Given the size and number of municipalities in India, green bond issuance has the potential to significantly increase the scale of capital mobilized at the local level. However, this potential is hampered by a lack of awareness and understanding of green bonds among municipal officials. Many people lack the ability to understand the intricacies of these financial products. Moreover, given the state’s limited capacity in human and financial capital, the introduction of green bonds will further strain state resources. To attract investors, local government corporations need to demonstrate strong management capabilities and the ability to recover debt costs. Building on the steps taken in Vadodara and Indore, India should continue to take advantage of the number of municipal corporations it has and focus on accelerating municipal green bond issuance to diversify the bond market.
To attract investors, local government corporations need to demonstrate strong management capabilities and the ability to recover debt costs.
A comparative study of Norway and Sweden reveals that Sweden’s relative success with green bonds can be attributed to the number of municipalities that can issue bonds. Swedish municipalities have developed separate frameworks and guidelines for green bond issuance. For example, the Stockholm region has developed a Stockholm metropolitan area-specific framework for defining eligible projects, revenue allocation, and reporting methods. These guidelines are based on specific sustainability goals for the region, taking into account the climate, economic and social environment.
India’s green bond market has the potential to expand by leveraging its populous and energy-intensive regions. This could be achieved by encouraging local governments to develop regionally focused green bond frameworks that take into account the environment, climate, natural resources and the most energy-intensive sectors. This will encourage existing local governments to issue green bonds and provide support to local governments considering issuing green bonds for the first time.
conclusion
India’s green bond market, especially the sovereign sector, is still in its infancy. Issuance is increasing and ambitious targets have been set, but sustained growth will depend on strong leadership from both governments and financial institutions. Green bond issuance is likely to be more active when governments demonstrate a clear and consistent commitment to sustainability in their public policies and financial market strategies, as evidenced by recent sovereign green bond issuances. It will be. Financial institutions must also continue their current momentum and lead the way in green bond issuance and sustainability efforts.
Naisha Deora is a research intern at Observer Research Foundation
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