India in the past few years has seen over-subscription of green bonds. This shows that there are high levels of interest in the issuance of green bonds from both issuers and investors.
Climate change is accelerating at an alarming rate. Sixteen of the seventeen warmest measured years since recordkeeping began in 1880 have occurred post 2001. <1> The reality of climate change and increasing atmospheric carbon levels is evidenced in the rising temperature and increasing acidity of ocean water, climbing sea levels and retreat of ice sheets and glaciers and the increasing frequency of droughts and floods across the world. The newest United Nations Intergovernmental Panel of Climate Change report has also sent fatalistic alarm bells ringing across the world. It suggests or warns that we have about a dozen years to keep global warming to a maximum of 1.5 degree Celsius, beyond which even half a degree will significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people. The landmark report suggests that urgent and unprecedented change are needed if we are to meet that target. The affordability and feasibility of these measures is however still left to doubt.
A 2015 Bloomberg report estimates that keeping the world below the 2-degree Celsius scenario, a threshold viewed as limiting the probability of devastating consequences will require USD 12 trillion over the next 25 years. <2> Official Indian government estimates state that India will require USD 2.5 trillion to meet its climate actions between now and 2030. <3> In the absence of a massive carbon tax scheme, bond markets will be central to financing these interventions. Specifically, “Green Bonds” i.e. bonds whose proceeds are used for an environmentally friendly purpose. The green bond market has international origins and includes many bond issuer types. The first green bond was issued in 2007 by the European Investment Bank (EIB). Other supranational issuers include the International Finance Corporation arm of the World Bank, which in 2013 issued the first $1 billion green bond. A benchmark example of a modern sovereign green bond is France’s $10 billion bond, issued in 2017.
During the year 2015-16 the Indian government sanctioned the introduction of Tax Free Infrastructure Bonds of INR 50 billion (USD 794 million) for funding of renewable energy projects. Furthermore, it set an ambitious target of building 175 gigawatt of renewable energy by 2020 which is estimated to require funding to the tune of a monumental USD 200 billion. <4> At the time the market and the financing mechanisms were fraught with several issues including sector limits, high interest rates and asset-liability mismatch. Therefore, the channels that were being explored to meet the financing challenges in the renewable energy space needed to not only provide the requisite funding but should also help in reducing the cost of capital. Green bonds seem to have provided a possible solution to this problem.
The first green bond in India was issued by Yes Bank in 2015. <5> The proceeds of the bond were to be used solely for renewable energy projects with a focus on wind and solar energy projects. Over the years, the green bond market has seen gradual expansion into several public sector undertakings, state-owned commercial banks, state-owned financial institutions, corporates, and the banking sector. <6> The 2017 Climate Transparency Group’s Brown to Green report ranks India fifth amongst the G20 countries when it comes to green bonds issuance in the country’s overall debt market. <7> This highlights the existing scale and future scope in the country to develop and grow green bonds as an instrument to accelerate green market penetration. The withdrawal of the United States of America from the Green Climate Fund <8> and a change in priorities under the Trump administration has further increased pressure on India and other emerging nations to source independent climate finance with lesser dependence on international grants. Green bonds provide an innovative tool for bridging the gap between capital markets and climate change.
India in the past few years has seen over-subscription of green bonds. This shows that there are high levels of interest in the issuance of green bonds from both the issuers and the investors. The tax-free bond issued by the Indian Renewable Energy Development Agency Limited (IREDA) in 2016 was oversubscribed by more than 5.1 times. <9> India has both small issue size bond (below USD 100 million issue) to very large issue size bond (USD 1 billion). Industry experts tend to favour small issue size bond as it is more suited to the Indian market. A national debt exchange and a competent domestic certifying agency are therefore essential to mobilise the green bond market and to tap domestic investors.
The support of the government is key to bringing the green bond market to scale in India. The Securities and Exchange Board (SEBI) in January 2016 published its official Green Bonds Requirements for Indian Issuers. <10> The guidelines have listed a broad category of projects that are considered green. Furthermore, in May 2017, SEBI has issued a circular setting out disclosure norms which would govern the issuance and listing of ‘green bonds’ in India (Green Bond Guidelines), in addition to the existing SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations). The Union Government in the 2018 budget proposed that regulators should consider A rated bonds for investment. <11> Such a move might help in attracting more corporations to the capital markets to raise funds.
Despite the massive strides made by the green bond market in the past three years there are still key challenges that the market currently faces and will continue to do so unless properly and timely addressed. There is a lack of concentrated support measures for such a nascent instrument due to which investors still view them as high-risk investments. Financial structuring and securitisation could be used to lower risk and persuade investors otherwise. There are issues with sector diversification as well. Unconventional investment sectors such as marine conservation and forestry are yet to be breached. These issues are further punctuated when coupled with the lack of methodologies and frameworks for evaluating diverse projects in the Indian context.
The green bond segment has certainly been successful in the past few years specially for a nascent instrument. However, to ensure that it does not soon peak or prove ineffective in advancing green growth, certain steps and innovative solutions need to be adopted to drive it forward.
The author is an Associate Fellow at ORF.
<1> https://www.giss.nasa.gov/research/news/20170118/
<2> https://about.bnef.com/blog/climatescope-2015-full-report/
<3> http://www4.unfccc.int/ndcregistry/PublishedDocuments/India%20First/INDIA%20INDC%20TO%20UNFCCC.pdf
<6> TERI (Unlocking the Green Bond Potential)
<7> Brown to Green Report 2017
<8> Article : U.S. Withdrawal from the Paris Agreement: Reasons Impacts and Chinas Response
<9> TERI (Unlocking the Green Bond Potential)
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Ayan Sharma was an Associate Fellow at ORF. His areas of research include climate finance health and sustainable development goals.
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