Introduction
Today, India is faced with a catch 22 situation of an ambition of becoming a USD 5 trillion economy by and achieving its SDG goals by 2070. While both these goals may seem contradictory; with huge energy requirements for one and conversion to sustainable energy for the other, the unified answer to both may lie in “green bonds”.
Green bonds are a type of fixed-income investment used to fund projects with a positive environmental impact.In 2007, a group of Swedish funds took part in investment opportunities that would benefit the environment. By November 2008, the World Bank issued the first green bonds and effectively gathered capital from investors for climate-related projects.
The issuers of Green Bond should explain how their Green Bond or Green Bond programme aligns with the four core components of the “Green Bond Principles”. The Voluntary best practice guidelines called the Green Bond Principles (GBP) were established in 2014 by a consortium of investment banks. The GBP emphasises the required transparency, accuracy and integrity of information that will be disclosed and reported by issuers to stakeholders. Ongoing monitoring and development of guidelines has since moved to an independent secretariat hosted by the International Capital Market Association (ICMA).
GBP have four core components:
- Use of Proceeds
- Process for Project Evaluation and Selection
- Management of Proceeds
- Reporting
The Green Bond Principles do not define what constitutes “green”. The green definitions are left to the issuer to determine. Broad green project categories suggested by the principles include – Energy, Buildings, Transport, Water management, Waste management & pollution control, Nature-based assets including land use, agriculture and forestry, Industry & energy-intensive commercial, Information technology & communications (ICT).
Internationally green bonds are rapidly gaining prominence due to increasing environmental regulations and corporate sustainability goals. Investor demand for eco-friendly investment options is growing with investors looking to align their financial goals with their values and contribute to positive change.
A notable example includes investment from Apple’s $4.7 billion in Green Bonds that have helped kickstar the development of new low-carbon manufacturing and recycling technologies. Apple has issued three Green Bonds since 2016, with projects showcasing how the investments can reduce global emissions and bring clean power to communities around the world.
Challenges
1. Greenwashing: Greenwashing refers to conveying a false impression or misleading information about the environmental benefits of a company’s products. It involves making an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do.
2. Lack of Reporting and Transparency: Green bond reporting is based on two simple pillars: disclosure upon issuance of the use of proceeds, which is displayed alongside and in conjunction with the second opinion report used to sell the green bonds, and the disclosed ongoing reporting post-issuance on the actual use of proceeds.
Green Bond Principles do not specify what constitutes ‘green’ use of proceeds. This is left to the issuer, its advisers and the second opinion reviewer. Current practice is to aver compliance with a broad category of published ‘eligible green projects’, second opinion reviewed as green and then for the issuer itself to decide specific usage of the cash proceeds raised.
Issuers have their own eligibility criteria or definitions of an eligible green project, some more specific and detailed than others. This would leave maximum room for manoeuvre for the issuer, with the investor then having to look at the post-issuance reporting to see what it in fact used the money for. That is rather opaque, and can be a factor to dissuade an investor who is concerned that the use of proceeds does in fact match with his own investment guidelines.
India: Critical Analysis
1. Lack of awareness: There is lack of awareness about the principles and benefits of green bonds. Investors require a comprehensive understanding of the standards that define green bonds, as ambiguity may deter their engagement.
2. India does not have a climate taxonomy: The government is yet to develop a “climate finance taxonomy” in order to increase the availability of capital for the purpose of climate adaptation and mitigation. The taxonomy helps classify economic activities aligned with climate commitments along with broader environmental goals other than climate.
3. Lack of standardised selection procedure: Challenges such as rigorous green bond certification processes pose obstacles for investors, especially in meeting stringent requirements for project verification and environmental standards with limited resources and infrastructure.
4. Lack of regulatory framework: The efforts of the Securities and Exchange Board of India (SEBI) to streamline India’s green bond framework led to revised disclosure requirements. The framework lacks standardised criteria and the involvement of uncertified third-party reviewers poses a corruption risk. The “comply or explain” (Regulation 1.8) regime focuses on post-dating environmental impact and lacks accountability for issuers. Non-compliance reasons are listed without specified repercussions. The annual report requirements have serious flaws as well, where the environmental damage is not quantified in measurable terms. While SEBI provides qualified metrics, they are often vague.
5. Limited credibility of projects: The lack of specific regulations for green bonds prevents investors from assessing financial risks and understanding the sustainability of long-term investments.
6. Costs associated with issuing Green bonds: the high costs associated with green bond issuance, including advisory services, credit ratings and project certification, pose challenges and hinder motivation for issuance.
7. Market Structure issues: Lack of credible credit rating services and underdeveloped exchanges, along with limited participation from institutional investors add to the challenge
On the international front, a blockbuster forecast has tipped the green bonds market to be worth anything between $4.7 trillion and $5.6 trillion by 2035.
The Way Forward for India
In 2023, India experienced the hottest February since 1901, the first year the country’s Meteorological Department started its weather records. Extreme weather events like this are becoming frequent and are expected to get worse due to climate change. India is one of the countries most affected by the extreme weather events.
As the world’s most populous country, with nearly 1.4 billion inhabitants, the carbon intensity of India’s economy has a direct impact on global emissions, and thus, on climate change. In 2021, India’s greenhouse gas emissions (GHG) amounted to some 3.9 billion carbon dioxide (CO2)-equivalent tonnes, making it the world’s third largest emitter, behind China and the United States, although GHG emissions per capita were only 2.8 CO2-equivalent tonnes, compared to a world average of 6.9 and 17.5 in the United States.
The Green Bond issuance in India in 2021 exceeded US$ 6.5 billion. Yet they contributed only 0.7% to India’s Bond Market and 1.4% to the global green bond market. Inspite of such meager contribution, Green bonds will play a significant role for achieving India’s net carbon neutrality target by 2070.
Improving the Indian government’s approach to green bonds necessitates incorporating the following policy changes regarding their issuance:
1. Enhancing transparency: Augmenting transparency in green bond issuance and viability is paramount in surmounting existing challenges.
2. Conducting specialised awareness programs: Organisations can design specialised initiatives to promote the advantages of investing in green projects. Introducing educational programs on green bonds is essential to raise awareness among investors.
3. Improving risk mitigation: Reducing various risks, including legal, default, liquidity, inflation, political, interest rate, and investment risks, necessitates carefully establishing an environment favourable to private investors. Implementing a robust legal framework regarding defaulters will instil investor confidence, mitigating default risk associated with such projects. Maintaining a stable economic environment with low interest rates and optimal inflation rates is crucial for attracting investors.
4. Focusing on domestic capital generation: Besides emphasising offshore investments, the Indian government should prioritise the establishment of a green capital pool to stimulate domestic demand.Research shows that countries with higher green bond issuance rates are better positioned to achieve sustainability goals, particularly in renewable energy expansion and carbon emission reduction.
5. Issuing investment mandates: Drawing from Moid’s (2017) research, the integration of green projects into institutional investors’ portfolios, with potential involvement from Indian institutions such as the Pension Fund Regulatory and Development Authority (PFRDA) and the Insurance Regulatory and Development Authority (IRDAI), holds promise. Studies indicate that such a strategy could effectively mobilise capital towards sustainable investments.
6. Adherence to international standards: Besides aligning with the sustainable development goals signed by member countries, government-issued SGBs should adhere to international practices outlined by the United Nations. Failure to do so may undermine investor confidence. Establishing a transparent and trustworthy environment is crucial for ensuring long-term success and achieving quality standards.
7. Guidance from RBI: It is essential to establish standardised guidelines for international investors to enhance their focus on green initiatives. Financial institutions, including central banks, can significantly contribute by mobilising resources for investors and offering timely advice on sustainable investment prospects. Emphasising the potential expansion of green bonds and highlighting the significance of collaboration between issuers and investors is imperative for promoting environmentally friendly investment practices.
By implementing these strategies, the Indian government can effectively address the challenges associated with green bonds and foster a conducive environment for sustainable investments.
Conclusion
Government-mandated disclosure standards for sustainability practices are essential for building trust in green bonds. A robust sustainability reporting framework will streamline green bond issuance, enhancing their reliability. Through cooperative initiatives between the government and regulatory bodies, India’s impact on the global green bond market can significantly evolve. These entities must proactively educate investors about the advantages and risks linked to sustainable investments while ensuring they have the requisite knowledge and tools for informed decision-making. Tackling these challenges fosters increased investment in green initiatives and advances sustainable progress.