Sovereign Green Bonds will debut in India today i.eJan 25, 2023, just a day ahead of the country's 74th Republic Day. The Indian government is offering ₹80 billion worth of 10-year and 5-year green bonds. Another tranche of ₹80 billion of 10-year and 5-year green bonds, to be referred to as "SGrB" (Sovereign Green Bonds) in Indian markets, will be offered on Feb 9, 2023.

The Union Budget 2022-23 announced the government's plan to issue Sovereign Green Bonds. It read:

"As a part of the government's overall market borrowings in 2022-23, Sovereign Green Bonds will be issued for mobilizing resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy."

There is an expectation that these bonds will bring down the cost of borrowing for the government and help the country lower its carbon footprint.

What Exactly Are Green Bonds?

As is often the case with most financial market instruments, there is no standard definition of a Green Bond.

A Green Bond is similar to any other bond in that it is a debt instrument that an organisation (or a government) issues to raise money from investors. The fact that the proceeds from a Green Bond issue are earmarked for financing "green" initiatives sets it apart from other bonds.

The main distinction between a "green" bond and a standard bond is that the issuer publicly declares it is seeking money to finance "green" initiatives or ventures that benefit the environment, such as renewable energy, and low-carbon transportation, among others.

Green Bonds Proceeds

The Green Finance Working Committee, headed by Chief Economic Adviser V. Anantha Nageswaran, has identified projects where proceeds from Sovereign Green Bonds will be invested. These projects relate to:

• Renewable energy.
• Energy efficiency projects in government buildings.
• Projects to cut electricity grid losses
• Public transportation.
• Subsidies for EVs.
• Climate observation, Early Warning Systems.
• Water conservation
• Pollution control.
• Organic farming, and forestry management.

Why Green Bonds?

Following numerous environmental catastrophes and severe weather occurrences, the need for sustainable financing has become apparent. This has been strengthened by both the demand for sustainable investment avenues from a segment of new-age investors and the increased acceptance of the distinction between a shareholder and a stakeholder.

At the 2021 United Nations Climate Change Conference, also known as COP26, in Glasgow, 197 countries, including India, committed to reducing global warming and promised more climate finance for developing nations.

Institutions including banks, NBFCs, and financial institutions have historically supported infrastructure financing in India. However, it is generally acknowledged that present project funding sources may not be adequate for capacity increase given the enormous investment required.

In order to leverage a larger investor base, including pension funds, sovereign wealth funds, and insurance firms that can invest in the infrastructure sector, new financing methods and novel financial instruments have to be introduced.

There are dedicated institutional investors that have a mandate to invest in Green Bonds. As a result, the pricing of Green Bonds is a lot finer than regular bonds.

Once the government starts issuing Green Bonds, companies and institutions that lend to infrastructure can benchmark against it and start issuing Green Bonds.

Benefits of Issuing Green Bonds

The key benefits of issuing green bonds are

Green Credentials

Green Bonds can help in enhancing an issuer's reputation and strengthen green credentials.

Investor Diversification

There is a specific pool of capital, which is earmarked towards investment in ESG-related aspects of projects. Green Bonds provide an issuer access to such investors which they otherwise may not be able to tap with a regular bond. According to Climate Bonds Initiative, globally $523 billion were raised through Green Bonds in 2021, up 75% from a year ago.

Pricing Advantage

The Green Bond issuance attracts a wider investor base, and this may in turn benefit the issuers in terms of better pricing vis-à-vis regular bonds. With the increasing focus of the global investor community on green investments, it is expected that a new set of investors will enter this space leading to lower the cost of funding for green projects.

Advantage From RBI, "Greenium"

Sovereign Green Bonds will be specified as securities under "Fully Accessible Route" for investments in government securities for foreign investors. This could ensure good liquidity in these instruments as well as strong demand from foreign as well as domestic investors.

The government has said it expects a significant "greenium" or "green premium."Green premium means the finer pricing green bonds would enjoy over regular sovereign bonds owing to dedicated ESG investors chasing these green bonds.

According to reports, the government has spoken to over 50 institutional investors before it announced the sovereign green bond issuance for this month and the next month.

The government is considering issuing another ₹320 billion worth of sovereign green bonds in the coming months.

Principles Of Green Bonds Issuance

International Capital Market Association has come out with a document called Green Bond Principles. The main features of the document are:

Use of Proceeds: Issuers will define and disclose the criteria for what is considered 'green' that is, which projects, assets, or activities will be considered 'eligible' and how much funds will be spent.

Project Evaluation and Selection: What process will be used to apply 'green' criteria to selected projects or activities.

Management Of Proceeds: What processes and controls are in place to ensure funds are used only for the specified 'green' projects.

Reporting: How projects will be evaluated and reported, against both environmental and financing criteria.

SEBI Definition

"Green debt security" means debt security issued for raising funds that are to be utilised for project(s) and/or asset(s) falling under any of the following categories:

• Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy, which use clean technology.
• Clean transportation including mass/public transportation.
• Sustainable water management including clean and/or drinking water, water recycling.
• Climate change adaptation.
• Energy efficiency including efficient and green buildings.
• Sustainable waste management including recycling, waste to energy, efficient disposal of wastage.
• Sustainable land use including sustainable forestry and agriculture, afforestation.
• Biodiversity conservation.

Green Bonds In India So Far

As per the Economic Survey, 2020-21, India occupies the 2nd spot after China in the cumulative emerging market Green Bond Issuance. A number of government agencies have contributed to the issuance of such bonds, particularly Indian Renewable Energy Development Agency and the Indian Railway Finance Corporation.

Currently, green bonds raised by various issuers are listed on India INX. Some issuers have also issued and listed their bonds on other international stock exchanges such as Luxembourg SE, and Singapore Exchange.

Indian companies raised nearly $7 billion through ESG and Green Bonds in 2021, compared to $1.4 billion and $4 billion in 2020 and 2019, respectively. As of February 12, 2020, the outstanding amount of green bonds in India was $16.3 billion.

Challenges

Indian issuers prefer issuing green bonds outside India because of low-interest rates and greater demand from global investors.

There is a lack of demand from local investors.

Greenwashing by issuers

Various issuers have been accused of greenwashing, and the same has caused significant reputational risk for socially conscious investors seeking to diversify. Greenwashing is the practice of channeling proceeds from green bonds towards projects or activities having negligible or negative environmental benefits. Independent audits and a robust taxonomy for the market and bonds will need to be done to prevent greenwashing.

Sources:Securities and Exchange Board of India,Reserve Bank of India,Ministry of Finance,Media Reports.