Will India’s Sovereign Green Bond debut be a game changer?

Green bonds are a means of raising funds for eco-friendly projects at a lower cost than regular bonds. The concept goes back only 15 years, when a group of Swedish pension funds wanted to invest in green projects as climate concerns grew. As more countries and institutions progressed, India also did not lag behind. Corporates were the first with Yes Bank’s issue of $160 million in 2015, and by 2021, the total annual issue by Indian companies increased to $8 billion. Large corporations such as Adani Green Energy and Tata Power are also reportedly looking to tap into green bonds and sustainability-linked loans.

As India aims to reduce carbon emissions by 1 billion tonnes by 2030, this change will be stronger, but not without challenges. Experts said that while India’s low credit rating becomes a setback in raising funds through global markets, lack of awareness among companies and investors can still be a tough hurdle. Tax benefits, transparent rules and regulations, standardization of issuance process, and clear norms of green projects, among others, are the need of the hour.

Lost Momentum?

Green bond issuance in India grew seven-fold year-on-year in 2021 as issuance was reduced in 2020 due to the pandemic, shows data from the Climate Bonds Initiative. But the growth was still four times that of the five-year average of 2015-2019. The road ahead can be a bumpy one. In the first half of 2022, issuances globally, including in India, have been weak: India accounts for only 28% of issuances for the full year of 2021, and globally, 36%. Experts attributed the slowdown to the uncertainties in the global bond market in general to the disruptions caused by the Ukraine War and the resulting financial instability and impending recession. This is likely to continue in the second half of the year as well, and even with the government’s planned $2 billion issue, India is unlikely to repeat last year’s performance. Still, with the government banning the green fund-raising bus, more companies could join in.

offshore dominance

While domestic certified issuances are likely to gain traction in the coming years, Indian companies are already tapping into the international green bond market through segments beyond green bonds, among which are stability linked bonds (SLBs) also industrialized. Gaining popularity for decarbonization. Experts suggest that their popularity is due to the flexibility and use of income of key performance indicators, as long as the sustainability goals stated by the company are met. According to the June 2022 CEEW-CEF report, about 67% of India’s $8 billion offshore sustainability-themed bond issuance was in green bonds, while about 20% was in SLBs. Sovereign Green Bonds can play a catalytic role in raising the profile of Green Bonds in India through a mix of foreign and domestic investors. As such, they also have the potential to stimulate the domestic corporate green bond market, said Gagan Sidhu, director, CEEW Center for Energy Finance.

much needed push

India’s sovereign green bonds could bring much-needed capital for its green transition, with proceeds going to projects that could help reduce the economy’s carbon intensity. With this, India will join a small group of 24 countries that have issued sovereign green bonds. Last year, four countries—Spain, Italy, Serbia and South Korea—made their debuts, according to the Climate Bonds Initiative.

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“It is expected that a sovereign green bond will increase the interest of local investors in green assets and, over time, the money will flow into green investments,” said Sandeep Bhattacharya, climate change advisor, GIZ India. “In addition, I expect that this will lead to the introduction of green-label bonds from many corporates in the country.”

There could be a big conversation in the coming years on deepening the market through regulation, transparency and assurance for investors. But for now, investors will keep an eye on the issuance’s interest rates, its tenure and green projects that will benefit from the proceeds.