Climate Finance: Jumping On The Green Bondwagon
India’s first-ever sovereign green bonds were issued by the Reserve Bank of India (RBI). The first batch worth Rs 8000 crore was issued on 25 January 2023, followed by another Rs 8000 crore issued on the 9th of February 2023. These bonds were oversubscribed four times with yields below those of the government securities, they qualify as Statutory Liquidity Ratio (SLR) securities and are fully accessible to international investors. This action reiterates India’s commitment to tackle the climate crisis with concrete action.
The climate challenge is huge, containing the rise of global temperature below 1.5 degrees Celsius, and needs both innovation and cooperation. Technology and finance can help in this endeavour, but it would require the transfer of technology and access to climate finance. These efforts are currently mired in political squabbles, corporate interests and economic ideologies, as evidenced by the difficult negotiations of the Conference of Parties (COP) 27 at Sharm El Sheikh, Egypt.
Mobilization of the financial resources of the world can be achieved through financial innovations such as green bonds, which integrate the efficiency of market mechanisms with the sustainable priorities of projects and investors. A green bond is a fixed-income financial instrument for raising capital from investors through the debt capital market, but with a condition that its proceeds ought to be utilized for green projects.
Green bonds as a financial innovation were initiated by the European Investment Bank through its inaugural € 600 million ‘Climate Awareness Bond’ in 2007. This was followed by the World Bank’s first green bond, valued at Swedish Krona (SEK) 2.3 billion in 2008. The first US Dollar benchmarked green bond of US$ 1 billion was issued by the International Finance Corporation (IFC) in 2013. Today, the international green bond market stands at cumulative US$ 2008 billion, a long way from 2007.
In India, this transition was led by Yes Bank which issued green bonds worth US$ 260 million in 2015. The recent Rs. 16000 crores (US$ 1.9 billion) issuance by RBI is another step in the evolution of a sustainable finance market in India.
The Securities Exchange Board of India (SEBI) in its Issue and Listing of Non-Convertible Securities (NCS) Regulation 2021 has detailed the category of projects which can raise funds via a “Green debt security”, this comprises of projects for renewable energy, clean transportation, water management, biodiversity conservation etc. A much more elaborate categorization of projects has been itemized in the recently issued ‘Framework for Sovereign Green Bonds’, by the Ministry of Finance, Government of India.
The Ministry of Finance estimates that India needs US$ 2.5 trillion (at 2014-15 prices) between 2020 and 2030, to meet its Nationally Determined Contribution (NDC) commitments, and green bonds are an effective means to fulfil them. The Economic Survey of India 2020-21, mentions that green bonds can improve the access of capital to the renewable sector. The issuance of sovereign green bonds for the mobilisation of resources towards green infrastructure was also emphasized in the 2022-23 Union Budget of the Government of India.
The Indian green bond market has seen tremendous growth in the last six years, starting from US$ 1.1 billion in 2015 to attain a cumulative value of US$ 18.9 billion by the end of 2021. The progress was led by the non-financial corporate sector, which has been a consistent issuer of green bonds. These were mostly issued for renewable energy projects, which is on the top of India’s agenda of building a greener economy through a massive energy transition from fossil fuels to renewables. This statistic is still small in comparison to the cumulative size of the Indian bond market, which stands at a massive US$ 1800 billion. Although the Indian bond market is dominated by government securities, it was the corporate sector that led green bond issuances, with deals such as Adani Green (US$ 1.35 billion) and Greenko Investment (US$ 940 million) capturing the headlines. The absence of government-sponsored green bonds was delaying the full-scale emancipation of the Indian green bond market.
India is lagging behind China in green bond issuances, the Chinese issued US$ 109 billion in green bonds in 2021 which is 15 times of the Indian issues. This can be attributed to the bigger size of the Chinese economy, but it also demonstrates how effectively sustainable finance has been integrated into their institutional mechanisms, with China issuing its ‘Guidelines for Establishing the Green Financial System’ in 2016. An outline for green bonds was created by India called the ‘Framework for Sovereign Green Bonds’ only in 2022.
The growth of the green bond market depends on, both improved regulatory frameworks which create demand for green projects, and macroeconomic conditions such as interest rates and credit cycles. The OECD suggests that rapid expansion of the green bond market will need a focused effort by policymakers and market participants. Hence, the entrance of Indian sovereign green bonds into the financial markets will have far-reaching consequences. The signalling effects of a central bank are as potent as its monetary actions, and thus RBI’s move qualifies as perfect in its macroeconomics and its symbolism, a much-needed combination in the green policy.
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