The test for India’s sovereign green bonds

Green bonds are an instrument to raise money—at lower cost than regular bonds—for environment-friendly projects. The concept goes back only 15 years, when a group of Swedish pension funds wanted to invest in green projects as climate worries grew. As more countries and institutions hopped on, India was not left behind. Corporates were the first, with YES Bank’s $160-million issue in 2015, and by 2021, total annual issue by Indian companies rose to $8 billion. Big corporations such as Adani Green Energy and Tata Power are also reportedly looking to tap into green bonds and sustainability-linked loans

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As India aims to curtail carbon emissions by 1 billion tonnes by 2030, the shift will get stronger, but not without challenges. India’s low credit rating becomes a setback in raising money through global markets, while lack of awareness among companies and investors may still be a tough hurdle to crack, experts said. Tax benefits, transparent rules and regulations, standardization of the issuance process, and clear criteria of green projects, among others, are the need of the hour.

Lost Momentum?

Green bond issuances in India grew sevenfold year-on-year in 2021 because issuances had dropped in 2020 due to the pandemic, shows data from Climate Bonds Initiative. But even compared to the five-year average of 2015-2019, the rise was still fourfold. The road ahead may be bumpy. In the first half of 2022, issuances globally, including India, have been weak: just 28% of the full-year issuances of 2021 in India, and globally, 36%. Experts attributed the slowdown to the uncertainties in the global bonds market in general due to disruptions caused by the Ukraine war and consequent financial volatilities and impending recession. This is likely to have continued 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. Nevertheless, with the government hopping on the green fund-raising bus, more companies may join in as well.

Offshore dominance

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

Much-needed push

India’s sovereign green bonds could bring in much-needed capital for its green transition, with the proceeds going to projects that could help reduce the carbon intensity of the economy. 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—had made their debuts, according to 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, lead to a flow of funds into green investments,” said Sandeep Bhattacharya, climate change advisor at GIZ India. “Besides, I expect this will trigger green-labelled bonds from many corporates in the country.”

The coming years could bring about a larger conversation on deepening the market through regulation, transparency, and assurances for investors. But for now, investors will keep an eye on interest rates of the issuance, its tenure, and the green projects that will benefit from the proceeds.

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