In recent years, sustainable finance has gained significant traction to combat climate change and promote environment-friendly initiatives. However, mobilizing large amounts through banks may not suffice the need which stems from the need for creative alternatives to traditional forms of finance.
One prominent tool in this space is the issuance of green bonds, which can provide capital for projects that have positive environmental or climate benefits. While green bond issuance has seen remarkable growth globally, India, despite its vast potential, has raised next to negligible amounts through these thematic bonds.
Globally many governments are turning to such bonds to raise funding for critical investment needs. The thematic bond market started in 2008 with the issuance of the first labelled green bond by the World Bank.
The global market for sustainable finance has registered considerable growth since 2014 mainly led by the issuance of green bonds. As per the data published (Climate Bonds Initiative, November 2022), cumulative green bond issuances as on September 30, 2022, have surpassed US$ 2.0 trillion, which includes sovereign green bonds (SGrBs) issued by 26 sovereigns aggregating to US$ 230.9 billion. European nations are the major issuers of SGrBs with 5-year and 10-year tenors being the preferred tenors of issuance.
India has just picked up these thematic bonds in the past couple of years, with the Government of India making a debut on Jan 25, 2023, just a day ahead of the country’s 74th Republic Day with a sovereign green bond issue. The Indian government raised ₹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” in Indian markets, were offered on Feb 9, 2023.
Although Indian corporates have raised (Apart from the Sovereign green bond issue) $43 billion (according to a Bloomberg NEF report.) since 2014 through green bonds for funding the growth of renewable energy in the country. There is still a lot more funding requirement to finance India’s green projects and issuers have been facing several challenges in harnessing green bonds effectively.
One of the biggest obstacles to the green bond issue in India is that investors, issuers, and regulators often misunderstand green bonds, their benefits, and principles. Due to compliance concerns and lack of investor demand, potential issuers may be deterred. Specialized training programs, workshops, and awareness campaigns are needed to educate stakeholders on green bonds’ benefits and mechanics.
Secondly, a supportive regulatory environment is crucial to stimulate investors’ interest in green bonds. Clear regulations and standards that align with global best practices provide investors with confidence in the market. The Securities and Exchange Board of India (SEBI) has taken steps in this direction by introducing guidelines for green bonds. However, further refinement and alignment with international standards, such as the Green Bond Principles and Climate Bonds Initiative, will bolster investor confidence. Additionally, ensuring robust oversight, monitoring, and reporting mechanisms will help maintain the integrity of the green bond market and foster investor trust.
Thirdly, India’s green bond issuance faces a shortage of qualified green projects. The country has a large pipeline of sustainable projects like renewable energy and energy efficiency, but many face development, finance, and bankability challenges. Investors can’t evaluate new projects’ environmental effects or financial sustainability without a specific project pipeline and standardization. Encouraging project developers and government agencies to prioritize green initiatives, expediting project approval processes, and offering technical assistance and financial support can enhance qualified project supply.
Then there is the problem of pricing the issuances. External evaluations, certifications, and reporting can increase green bond issuance costs. In price-sensitive India, greater issuing costs can dissuade issuers. This challenge requires novel financing methods like green bond insurance or guarantee programs, concessional funding, tax benefits or subsidies, or carbon credits for issuers. These techniques can reduce expenses and make green bonds more profitable for issuers. A lot of Indian issuers frequently issue green bonds in the international market (USD bonds) to avail the benefit of tighter pricing and ‘Greenium’.
Lastly, Green bonds need investor appetite and market liquidity. The Indian market lacks depth and breadth despite increased interest from institutional and retail investors. Investors may worry about green bonds’ risk-return profile, transparency and innovation compared to regular fixed-income securities. Transparency, standardized reporting and independent third-party verification can boost investor confidence and market liquidity by increasing the investor pool.
Developed countries often offer a range of tax incentives and carbon credits to promote sustainable practices and combat climate change or referred to as ‘Greenium’. Some governments offer voluntary carbon offset programs where firms or individuals can buy Verified Emission Reduction (VERs). These offsets represent projects that reduce or remove greenhouse gas emissions, such as afforestation projects, renewable energy installations, or energy efficiency initiatives. The purchased offsets can be used to compensate for the buyer’s emissions.
Green bond issuance has the potential to mobilize substantial capital for sustainable projects in India and contribute to the country’s climate goals. However, above mentioned challenges need to be addressed to unlock the full potential of this financing instrument.
