Green Bonds in India: The Present and What Next

[Naga Sai Srikar HK is a fifth-year B.A., LL.B. (Hons.), student at School of Law, CHRIST (Deemed to be University) Bangalore]

Green bonds (GBs) have lately gained prominence globally and are being seen as a lucrative opportunity by both investors and corporations looking at debt financing options. The Covid-19 pandemic has nudged policy makers across the world to rethink on priorities and adopt measures which enable a sustainable economic recovery. It is therefore estimated that sustainable bond issuance would hit a record high of $650 billion including a forecast of $350 billion in green bonds globally in 2021. While Indian corporates raised close to $4.96 billion through sustainable bonds, including GBs, in the first half of 2021, Ghaziabad Nagar Nigam became the first issuer of Green Municipal Bonds, thereby creating an avenue to display its niche market status in India. Although India stands second amongst emerging green bond markets after China, India’s figures are dismal in comparison to China and the United States of America (USA) who top the table. In highlighting the need to incentivize GBs in India, this post shall first lay out the concept of GBs, its existing regime in India, and India’s existing commitment towards climate change and sustainable development goals (SDGs). Thereafter, the post shall analyse the success of certain green bond markets, the possible incentives India could provide to encourage GBs, and shall thereby conclude by exploring how the green bond route maybe used to fuel India’s green infrastructure.

Green Bonds and the Indian Regime

A Green Bond is a type of a bond which is issued to finance projects that generate environmental benefits, such as renewable energy, energy efficiency, clean transportation and sustainable water projects, among others. It is pertinent to note that GBs differ from Sustainability Linked Bonds (SLBs). SLBs, which form a type of Environmental, Social, and Governance (ESG) Bonds, are issued to raise funds by corporates who commit to a certain specific ‘Sustainability Performance Target’. Furthermore, unlike GBs, funds raised through SLBs are not tied to a specific project or use and can be utilized for general corporate purposes by such issuer.

In order to qualify as GBs, the International Capital Market Association (ICMA) under its Green Bond Principles (GBPs) recommends four core components to be met with, which include the following: (a) proceeds must be used for green projects; (b) they must indicate the process adopted for project evaluation and selection; (c) they must maintain transparency in the management of proceeds; and (d) they must enable reporting of information pertaining to the use of the proceeds. In India, the Securities and Exchange Board of India (SEBI) had published a concept paper on issuance of GBs in 2015. Thereafter, SEBI notified a circular dated 30 May 2017, which provides for the Disclosure Requirements for Issuance and Listing of Green Debt Securities in India. A Green Bond under the circular is defined as debt securities which are to be utilised for projects and/or assets falling under any of the following categories:

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

Thus, the above definition is within the broad framework of ICMA’s GBPs with certain divergences. For instance, SEBI does not mandate the appointment of a third-party reviewer or certifier to evaluate the project, and a disclosure is to be made only upon such an appointment. Similarly, SEBI mandates half yearly reporting of utilisation of the proceeds and requires an external auditor’s verification, which is a deviation from the annual reporting norm followed internationally.

India’s Commitment to Climate Change and Sustainability

Under the Paris Agreement, India’s Intended Nationally Determined Contribution (INDC) for the period 2021 to 2030 include reducing the emissions intensity of its GDP by 33% to 35% from 2005 levels, achieving 40% cumulative electric power installed capacity from non-fossil fuel based energy resources, and establishing 2.5 to 3 billion tonnes of carbon dioxide equivalent in forest cover by 2030. Although India has indicated that it is on track to achieve its commitment under the Agreement, an estimate as per the INDC has suggested that India would require at least $ 2.5 trillion (at 2014-15 prices) to meet all its commitments between now and 2030.

In terms of SDGs, which include clean water and sanitation, clean energy, sustainable cities, and climate action, India’s performance has been declining with its rank slipping to 117 from 115 among 193 UN member States, indicating that India has to do much more. Therefore, India’s ambitious projects, such as installing 175 GW and 450 GW of renewable energy capacity by the year 2022 and 2030 respectively, the development of Ultra Mega Renewable Energy Power Parks, and the Grid-Connected Rooftop Solar (RTS) Programme, among others, form a crucial element, and their success is key to India’s commitment to climate change and sustainability programs.   

International Practices on Incentivization

It is pertinent to note that India is only third behind China and USA in global greenhouse emissions, and is therefore competing with some of the strongest and most resource-rich economies of the world to bankroll its green ambitions. Hence, it is imperative for India to build enough funding capabilities to support its green initiatives and prepare to meet its future international obligations. As previously observed, USA, Europe and China stand as the largest green bond markets in the world. For instance, USA accounted for $52.1 billion worth of GBs, aggregating to 18% of the world’s share and also led the table with 144 individual GB issuers in 2020. Like India, China too formalized its policy on GBs only in 2015. Regardless, its domestic green bond market has quadrupled in size from a meagre $29 billion in 2016 to $120 billion. India has, however, witnessed a mixed response to GBs. With a high of 12 issues (valued at $3168 million) in 2017 to a low of one issue in 2018, India’s green bond market has not seen consistency in terms of growth. Furthermore, the difference in green bond value issued by the markets of China and India are significant. Therefore, India needs to take steps to incentivize and bridge this gap at the earliest and ensure significant rise in domestic green bond market.

Direct financial incentivization is one such tool used globally. Subscribers to such GBs are provided with direct financial benefits, such as tax exemption on interest or tax deductions. Internationally, this scheme has been provided only to municipal and sovereign GBs. In the Indian context too, a blanket tax deduction of up to Rs. 20,000/- per year under Section 80CCF of the Income Tax Act 1961 for certain notified long-term infrastructure bonds is available. However, in all cases, the tax incentive has been provided to GB issuances only by Municipal Bodies, Development Finance Institutions or Public Sector Undertakings. While sustainable investing has gained traction in India, the same is restricted to non-retail investors and, therefore, tax sops for corporate GBs maybe introduced to open up the retail investor participation.

On the other hand, a ‘green bond grant scheme’ on the likes of Singapore and Hong Kong may be adopted in the Indian context to incentivize issuers. For instance, Singapore under the MAS’ Sustainable Bond Grant Scheme provides a grant of $100,000 or 100% of the eligible expense per qualifying issuance and covers:

• Costs incurred in respect of the independent external review or rating done based on any internationally-recognised green/social/sustainability bond principles or framework.
• Pre-issuance external review or rating.
• Post-issuance external review or reporting for allocation and reporting done annually for the first 3 years or up till the tenure of the bond, whichever is earlier.

It is therefore opined that such a scheme ensures that issuers are constantly adopting stringent pre- and post-review mechanisms so as to comply with international GBPs and thereby is an effective tool of incentivization.

Conclusion

Covid-19’s impact, coupled with President Biden’s focus on climate change, has brought the Paris Agreement commitments back into spotlight. While India may be on track to achieve its 2030 commitment, the carbon-neutral goal of 2050 is a long road ahead and requires extensive infrastructure in the renewable and sustainable energy sector. With global investors looking at sustainable investments, GBs form a lucrative option globally. In the Indian context, GBs have witnessed a mixed response with issuers primarily relying on foreign capital. Therefore, incentivization is key to thriving India’s already shallow corporate bond market. Incentivization would also transform a yield-oriented investor sentiment pertinent in India to a more environmentally conscious one. While direct financial incentives like tax sops to corporate green bonds must be evaluated to spur investor demand, grants to issuers by the Government would enable them to appoint international reviewers of repute which, would snowball into elevating the rating of the debt-instrument, thereby increasing the number of issuances in the country. Therefore, quick policy measures must be adopted to ride the global wave.

– Naga Sai Srikar HK