RBI has come up with the India Sovereign Green Bond Framework, which is based on the Panchamrit concept announced by India at COP26, Glasgow
At a time when even G20 is focusing sharply on green finance, climate actors are exploring the avenue of green bonds successfully. India’s debut of the sovereign green bond in landing a premium or greenium is a testimony to its success and promises to help accelerate climate action.
According to a report, Landscape of Green Finance in India 2022 by Climate Policy Initiative, the green finance flow in India is not in line with what India needs (in 2019, it was $44 billion) and is just a “fourth of India’s need”. India aims to be net zero by 2070, and green bonds proceeds are one of the ways to finance climate action. Sovereign Green Bonds (SGrB) were conceived in the Budget 2022- 23 to decrease the “carbon intensity’’ of the economy.
India’s tryst with green bonds is not new. The first green bond was issued by the World Bank in 2008, and it was used in investing in Rampur Hydropower Project. Now, India has come up its first SGrB launched by Reserve Bank of India (RBI) recently.
To build the ecosystem, RBI has come up with the India Sovereign Green Bond Framework, which is based on the Panchamrit concept announced by India at COP26, Glasgow. The framework is also in line with the International Capital Market Association (ICMA) Green Bond Principles (2021).
The advantage of green bonds are varied. Securities and Exchange Board of India (SEBI) in a document titled Disclosure Requirements for Issuance and Listing Green Bonds states that worldwide a big basket of capital is reserved for green investments. The provision of capital is guided by the Environmental, Social and Governance (ESG) related aspects of projects. Green bonds aid the issuer with “access to such investors which they otherwise may not be able to tap with a regular bond”.
Namita Vikas, Founder & Managing Director, auctusESG LLP, says, “Green bonds do provide a simple way to hedge climate risks that materialise over the long-term, and at multiple levels- sovereign, municipal and corporate. The changing regulatory landscape and sovereign issuances in markets like India have enabled a risk-adjusted return opportunity, which speaks for the validity of these instruments.”
The green bonds also come with their own set of problems. Experts point out that the rupee denominated green bond may face the currency performance issues and demand issues by the foreign entities. Inflation and currency weather are also causes of concern. The bonds were “expected to garner demand from foreign portfolio investors, yet the subscription was predominately supported by local banks and insurance companies along with few foreign banks. Foreign Portfolio Investors (FPIs) played a peripatetic role,” says Inderjeet Singh, Partner, Head – Climate and ESG, Deloitte India.
Independent of the nature of economy, whether it is a developing or developed country, the green bond market does not “give back the same returns as that of conventional instruments. The relatively lower return is called greenium or green premium,” says Singh.
He adds that green bonds were issued with a greenium, “as the instrument, by design, is expected to ensure relatively cheaper access to capital. Both 5- year and 10- year green bond coupons were sold at 5 and 6 basis points, respectively below the comparable government securities.”
SEBI in its document discusses the eligibility of the projects that would be deemed as green. If left to the issuer to define, it may lack clarity and open to wide interpretations. The clear definition would also “prevent the accusations of greenwash (allegations stating that the projects are not green)”. To deal with this, the globally accepted and available definitions of green bonds would be considered.
Further clarity is given in The Sovereign Green Bond Framework that defines a green project as the projects involving reduction of carbon and greenhouse emissions, leading to climate resilience or mitigation and projects which fulfil the United Nation’s Sustainable Development Goals (SDGs).
The framework also talks about involving a third party ‘external reviewer’ to undertake yearly monitoring. The Center for International Climate and Environmental Research (CICERO) has reviewed the framework. According to CICERO’s shades of green methodology, the projects fall in the shades of dark green, medium green and light green.
The colour coding has also been contested by experts. Vikas says, “The lack of globally or locally accepted standards and consistency in verification contributes to the perception of different shades of green. In India, the sovereign green bond providing clear green categorisation on use of its proceeds is now serving as a base or a starting point to standardisation.
She adds, “In addition to this, transition support to ensure the right application of guidelines, is necessary. We are seeing product downgrades across the EU despite the taxonomy and regulations. This clearly makes a case for proper implementation and tightening of definitions to curb the criticism and challenges around green bonds.”