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INTRODUCTION
The environmental conditions are worsening day by day worldwide. Rising temperatures, forest fires and ecological imbalance are some shreds of evidence. Climatic change is not just a country’s problem anymore rather it is worldwide. India, which is developing at the cost of the environment cannot shed away its responsibility. As per the reports released by Environment Performance Index- 2022 by World Bank, India has been ranked in the bottom five countries depicting one of the worst environments for the sustainability of the people. There are a plethora of initiatives being adopted by countries to fight climate change and one such golden initiative is green bonds.
Green bonds are debt securities that use their proceeds for environmentally responsible investing. These investments are done in the area of sustainable and renewable energy, water conservation, climate adaptation, aquatic conservation, waste management, and such things which are good for the environment. The use of funds on the environment is what makes green bonds diverse from regular bonds. Green bonds are appealing due to their simplicity in structure, procedure and key elements. It has a clear set of definitions along with clarity to investors regarding its end utilization.
Recently in budget 2022-23 Finance Minister, Nirmala Sitaraman revealed the government’s intention to issue a green bond in the lieu of the motto of “net zero emission by 2070”. India plans to issue 160 billion rupees of sovereign green bonds by the end of march 2023, as it looks for cheaper backing to meet its renewable energy targets. The area of a green bond is still undiscovered which is why there is a need to dig to learn about it. This paper will converse about the meaning of green bonds, the journey of green bonds, regulations surrounded by green bond with some challenges faced and finally coupled with way forward.
Brief History
In 2007, European Investment Bank became the first issuer of green bond with issuance of $600 million climate Awareness Bond (CAB) which was followed by Word Bank. In 2021,$417.8 bn has been raised through such bond and this year it is expected to be around $650 bn. Indian green bond market started with YES Bank’s $5 million masala bond in 2015 and since then there has been no turning back. Nearly $6.1bn green bond was issued in 2021 alone though only accounting 0.7% of the overall debt market but it is growing at a tremendous pace. Now, with the rise in Environmental Social Governance (ESG) filings and companies proactively looking to invest in green projects have multifold its demand. SEBI with an intent to ease compliance cost and give more comprehensive definition to green bond bought in a consultation paper on green and blue bond.
Regulations surrounding the green bond in India:
Green bonds are defined not through mode of issuance but through end utilization of the said debt. Green Bond Principles (GBP) recognizes ‘green projects’ as related to (i) renewable energy (ii) energy efficiency; (iii) pollution control; (iv) Green building and Real estate; (v) Refurbished goods; and (vi) sustainable water management systems.
SEBI through Disclosure Requirements for issuance and Listing of Green Debt Securities (Disclosure Requirements),2017has defined green securities as those which is used for renewable and sustainable energy project, clean transportation, sustainable water, land and waste management, climate change adaption, energy efficiency and biodiversity conservation.
There is no specific requirement for unlisted green securities but for listed one the offer document should contain the environmental objective behind the said issue, the method through which it was determined that such securities falls under green securities. Also, the process of tracking and reviewing the proceeds end utilization within the specified project.
The provision of external review by third party for the issuance of green securities has been kept optional but issuers are to verify the process of tracking and method of use of proceeds through an independent auditor.
Additional reports to be include filing along with half yearly and annual financial results in case of green bonds. Some of them are:
- Details of the utilized and unutilized proceeds of the issue.
- Brief description of project under which amount from green securities are disbursed.
- Methods and results of qualitative performance indicators.
In addition to such disclosures, the company requires certain Environmental social governance (ESG) disclosures. Regulation 34 of the SEBI (Listing Obligations and Disclosure Requirement Regulations), 2015 requires 1000 listed companies to mandatorily file BRSR (Business Responsibility and Sustainability report) marking out all the initiatives and procedures adopted in furtherance of ESG.
Despite India, beingsixth largest green bond issuer its potential is still under-tapped. The primary reason being its lack of proper structure and general bond market. To overcome this government has bought certain changes in recent years:
- Partial Credit enhancement (given to small issuers) limit has been extended from 20 to 50 percent of the issue.
- For large borrowers bank loan limit has been increased as well as capital charges
- Banks are now permitted to issue masala bond to meet their capital requirements
- Easy pathway for a foreign investor to invest in Indian securities.
Impediments to green bonds:
Bare looking at green bonds makes them eye-catching as it holds copious advantages and it is good for the environment but regardless of the far-reaching benefits of green bonds, it is not flaw proof. Green bonds are particularly at an embryonic stage as the concept is still budding. Private and public sector project developers are still educating themselves about its utility. That is why there is no standard legal definition of green bonds means sometimes investors are not aware of the utilization of their money and it can be used for other projects than green ones.
As per the paper published by RBI “Green Finance in India: Progress and Challenges”, green bonds make only up to 0.7 percent of bonds issued In India. In the Indian context, the cost of issuing are remained higher than the regular bonds, this can be recognized from the lack of reporting or verification for tracking where is the invested money being utilized and the deficiency of policy and benefits structure at the national as well as state level.
The high demands from the investor for green bonds have shaped greenium (Green premium) and securities offer lower yields when compared to normal bonds. Green bonds also suffer from the mispricing of environmental risk.
The problem of greenwashing is mounting it means deceptive promotion that the organization’s policy or product is environment friendly but in reality, they do not follow the standard or requirement of green bond. One recent instance of greenwashing was when the green bond issued by the operator of Three Gorges Corp. in China was heavily criticized for the destruction of the ecosystem and pollution of the water.
Another instance of greenwashing is $1bn raised by the Hong Kong Airport Authority via green bond to help the development of a third runway was criticized that it will cause further problems to Chinese white dolphins that are already at the edge of extinction. These risks of potential abuse of investors’ money possess the opportunity of undermining the credibility of green bonds and eventually it affects the creditworthiness of the project also.
Way forward and suggestions:
The market for green bond securities is developing at a tremendous pace. Apart from giving a substantial propel to green projects and helps in overall sustainable development it is also bringing foreign capital and investments towards sustainable projects. Adding feathers to ambitious plan of india’s net carbon free by 2070. With India eying for US$5 trillion economy in coming years bond market through corporate funding is going to play substantial role as seen in western countries where already 50-60% of GDP consists of corporate bond.
The present regulations are not enough to tackle the uncertainties surrounding green securities. As there are still issues pertaining to allotment of green securities, proper execution of the project, dispute resolution mechanism, clearance with respective departments, lack of proper credit system etc. Overcoming these would boost investor confidence in such securities and can add a lot of value.
India should work on a decentralized model of raising green bond where state should come forward with such issuance. Barring certain instance like kerala Infrastructure Investment Fund Board (KIIFB) listed a masala bond on London stock exchange for flood rehabilitation and repair programme there has been not much participation from states. India should learn from china where Local Government has contributed significantly towards the development of green bond. For instance, the province government of Jiangsu offered green bond with 30% subsidy as well as a risk compensation mechanism worth 30%. A decentralized model for India would not only bring new investors and option but also would develop a healthy competition between states making them more innovative.
On demand side of the green assets, India needs to work on certain areas like creating sensitization in society with respect to environmental hazards and financial decisions for safeguard of such risks. It needs to provide prompt and effective fiscal remedies like tax exemption and risk absorption. To better regulate green securities, it needs to come up with detailed guidelines regarding investment, classification and end utilization of proceeds of green securities. A green bond fund should be brought akin to infrastructure funds which will prompt investors like an insurance company, mutual funds etc. to actively look for green investments. Stock market plays a substantial role in securities and bringing an index specific to Indian green bond would incentivize domestic and foreign investors in such bonds.
On supply side of the green assets, India should provide clear guidance on standardization of green bond issuance, reporting, disclosure or external review and attempt should be there to bring normal securities compliances on par with green securities so there are less additional cost. India’s national policy should align with international policy bringing Indian standards to those of international environmental targets like Paris Agreement, SDG etc. India should work on decentralized model where issuance can be done at municipality level and this can be achieved through capacity building at such level. Domestic banks should be supported through infrastructure and capacity building programs on how, when and where to issue green bond along with strengthened internal mechanism for review and advisory purposes. The lack of credit rating for Indian green bonds is diminishing the value of bonds which can be enhanced through proper credit rating mechanism. Also, support should be provided in exploring new market system and innovation in products which will in turn felicitate green investment in India.
Initial years of Indian green market has been very successful but there remains a lot to hurdles ahead. To keep up the momentum, India should come up with a comprehensive policy framework, infrastructure as well as climate policy to cater to ever-growing demand of green investment.
Conclusion
Green bonds are showing tremendous potential in upcoming years with every country shifting its focus on sustainable development. Such bonds while serving the purpose of development and employment generation also caters to environmental need thereby creating a space for better use of capital. The experience of developed countries has showed that green bond trades at premium over conventional bonds which is popularly known as “greenium” making it lucrative than other bonds. To make it more lucrative government and meet its renewable energy goals government can come up with tax exemptions and certain other benefits. Green bonds require regular disclosure of utilization of proceeds, status of project, low cost to issuer and benefit in form of premium to borrower. These things will go long way in developing domestic green bond market and at the same time fulfilling India’s ambitious goal of reducing carbon emission by 1 trillion till 2030 and going net carbon free country by 2030.
