The recent Covid-19 pandemic has made it abundantly clear that
global scale disasters without timely mitigation and planning can
have a deep and lasting economic and social impact. The Climate
Impact Lab estimatesthat 76% of
the world's population will suffer from higher mortality rates
and an additional of 9.1 million people will die each year till
2100 if climate change remains unaddressed. This will be
particularly challenging for some countries as the effect of
climate change is predicted to be distributed unevenly throughout
the world. David Rotman, the editor of MIT TechReview (23 April
2019) has observed that India
will bear more than 20% of global social cost of carbon. With no
boundaries to the social cost of carbon, the economic future of
countries is becoming more interlinked. Assessment, financing and
implementation of climate changes targets is needed at the national
level so that the impact can be sustained at a global level.
To this end, countries have set national targets in respect of
longs terms goals to the Paris agreement such as limitation of
greenhouse emissions and global warming at the 21st conference of
parties to the 1992 United Nations Framework Convention on Climate
Change in 2015. India's targets outlined under India's
Intended Nationally Determined
Contribution(INDC)
estimate that India will require at least USD 2.5 trillion (at
2014-15 prices) to implement its climate change goals. As of now
India's climate change actions have been primarily funded
through domestic sources (India's INDC).
Options for financing of green initiatives include green bonds,
carbon tax, funding from green institutions such as green banks
etc. The first green bond was launched in 2007 by European
Investment Bank to raise funds for renewable energy project through
structured debt. India's first green bond was launched by Yes
Bank Limited in 2015 to raise INR 5 billion to enhance long-term
resources for funding infrastructure projects in renewable and
clean energy projects such as wind, solar, biomass and hydropower.
These green bonds issued by Yes Bank were listed in India on the
BSE (formerly known as the Bombay Stock Exchange) with a tenure of
10 years and coupon rate of 8.85% per annum.
As of February 2020, India had issued an outstanding amount of
US$ 16.3 billion in green bonds (Green Finance in India: Progress and
Challenges, RBI Bulletin January
2021). While India is
relatively new to green bonds, it is the second largest emerging
market for green bonds. However, India does not have any dedicated
law governing issuance of green bonds. The Securities and Exchange
Board of India (SEBI), the Indian securities
market regulator, has discussed aspects of green bonds in a
memorandum and subsequently in 2017 issued a circular (SEBI
Circular) on disclosure requirements to be followed for
green bonds listed on Indian stock exchanges. General provisions
related to issuance of bonds by Indian companies are detailed under
Companies Act, 2013. In addition, the Securities and Exchange Board
of India (Issue and Listing of Debt Securities) Regulations, 2008
which governs bond issuances on Indian stock exchanges also applies
to green bonds issued by Indian companies if such bonds are
proposed to be listed on Indian stock exchanges. Overall, Indian
law regulates bonds with the objective of protecting subscribers
through mandatory provision of trustee for certain bond issuances,
security coverage for listed bonds and maintenance of minimum
reserves for repayment of bonds.
Prior to the SEBI Circular, issuers such as Yes Bank Limited
relied on global standards to classify their bonds as green bonds.
Yes Bank's green bond which was listed on the BSE in 2015 was
classified as a green bond on the basis of the Green Bond
Principles, 2014, which is a voluntary process guideline for
issuance of green bonds. The SEBI Circular has defined green bonds
as those bonds where funds have been earmarked for green projects.
SEBI recognizes the following sectors eligible as green projects
(i) renewable and sustainable energy (wind, solar etc.), (ii) clean
transportation (mass transportation), (iii) sustainable water
management (clean and/or drinking water, water recycling etc.),
(iv) climate change adaptation, (v) energy efficiency (efficient
and green buildings), (v) sustainable waste management (recycling,
waste to energy etc.), (vi) sustainable land use (including
sustainable forestry and agriculture, afforestation etc.) and (vii)
biodiversity conservation. Following the SEBI Circular, Indian
issuers may rely on the above classification to categorize their
bonds as green bonds. For instance, bonds issued by the Ghaziabad
Nagar Nigam in 2021 are green bonds under SEBI's classification
as the proceeds of the bond was required to be utilized towards
financing a tertiary treatment plan at Indirapuram to generate
industrial grade water.
Indian law does not mandate any pre-issuance review process for
review of project evaluation and selection criteria for projects
eligible for green bond financing. As Indian green bond market is
at a nascent stage, the option to appoint an independent reviewer
has been left to the discretion of the issuer as long as details of
such appointment are disclosed in the offer document. Further, if
an issuer follows internationally accepted standards to measure
impact assessment, to identify projects, to utilize project
proceeds then the issuer is required to disclose the adopted
standards in the offer documents and on a continuous basis. This
disclosure requirement helps to prevent green washing. Some Indian
issuers have voluntarily used independent services providers to
provide assurance services on the use of proceeds in line with
green bond principles.
As the green bond market is dependent upon investor perception
of impact, SEBI has set out the criteria for issuers to promote
bonds as green bonds. Issuers are required to provide minimum
disclosures in the bond offer documents and on a continuous basis.
The bond offer documents should contain a statement on
environmental objective of the issuance, detail the process to
determine eligibility of projects or assets as green project or
assets, detail the green projects and assets (including any
refinancing of existing green projects) and detail systems used for
tracking use of issuance proceeds.
Other than the above, SEBI requires issuers of green bonds to
provide details of utilization of proceeds verified by external
auditor along with the half yearly and annual financial results.
The annual report of the issuer must provide details on projects
and assets to which the proceeds of the green bond have been
allocated and performance indicators to ascertain the environmental
impact. If the issuer is unable to provide quantitative performance
indicators, then the issuer should explain the reasons for
inability to do so in its annual return. These checks and balances
help ensure that the proceeds of the green bonds are being utilized
appropriately for green projects. Measuring impact of impact
investment through ascertainable techniques and quantifying such
impact has been one of the key challenges of impact investment.
Mandatory disclosure of qualitative performance indications ensures
that issuers are obligated to provide at least the minimum
information to investors to assess whether their funds are
resulting in the desired impact. As the green bond market grows,
SEBI may consider revising the disclosure norms for green bonds and
making disclosure of performance indicators mandatory for green
projects and penalizing bond issuers for failure to make adequate
disclosures.
Indian issuers have also listed green bonds and raised capital
through the foreign bond market through USD denominated bonds. JSW
Hydro Energy Ltd (a subsidiary of JSW Energy Limited) in 2021
raised USD 707 million through the international bond market for
repayment of debt in existing hydro-energy projects. Indian issuers
have also listed green bonds on BSE's India International
Exchange (India INX) at the International
Financial Services Centre (IFSC) of the Gujarat International
Finance Tech City (GIFT City). Currently, Indian issuers have
raised USD 5.42 billion through nine green bonds listed on the
India INX with interest rates of 3.835%, 4.5% and
6.25%.
Details of recent key green bonds issued by Indian
companies
Issuer |
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Ghaziabad Nagar Nigam (2021)
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Sustainable water management
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Yarrow Infrastructure Pvt. Ltd. (2021)
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JSW Hydro Energy Ltd. (2021)
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ReNew Wind Energy Delhi Pvt. Ltd. (along with nine group
companies) (2021)
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Wind and solar energy generating assets
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State Bank of India (2019)
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Renewable energy, low carbon buildings, waste and pollution
control transactions, sustainable transportation and industry and
energy-intensive commercial transactions
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Adani Green Energy UP Ltd., Adani Green Energy (UP) Limited,
Parampujya Solar Energy Pvt.
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Singapore Exchange and India INX
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Green bonds issued by Indian issuers in the overseas bond marker
have been issued in accordance with globally accepted green bond
framework. For instance, the ReNew Power green bond (2021) listed
on India INX has been certified under the Climate Bond Initiative.
Bonds raised by Indian companies from global markets are considered
as debt or external commercial borrowing. Such overseas bonds are
required to comply with the Foreign Exchange Management Act, 1999
and in particular Master Directions on External Commercial
Borrowings, Trade Credits and Secured Obligations dated March 26,
2019 and Foreign Exchange Management (Borrowing and Lending)
Regulations, 2018 (ECB Regulations). The ECB
Regulations govern certain aspects of the bonds such as minimum
maturity period, ceiling on all-in cost of borrowing, default rate,
parking of proceeds for issuance of bonds by Indian issuers,
reporting of use of proceeds, reporting of interest payment and
redemption of bonds.
One of the challenges to issuance of green bonds in India is the
high cost of issuance of green bonds. The cost of issuance of
green bonds is generally higher than other corporate bonds or
government bonds and green bonds are typically issued by public
corporations or private sector companies with better financial
health(Green Finance in India: Progress and
Challenges, RBI Bulletin January
2021). Even with
respect to green bonds listed on India INX, it appears that the
cost of issuance is lower for public sector companies. Indian
Railway Finance Corporation Limited and State Bank of India were
able to issue green bonds on India INX at coupon rates of only
3.85% and 4.50%. Whereas private sector companies (Adani Green
Energy and ReNew Power group) which have issued green bonds on
India INX have issued the green bonds through multiple group
companies at a coupon rate of 6.5%. If the cost of issuance
continues to remain high, small and medium size private sector
companies will not be able to capitalize green projects through the
bond market. Financing through green bonds continues to remain
focused on mature infrastructure sectors such as energy and is yet
to make a concrete impact in unconventional sectors such as
reafforestation, climate change technologies etc. Unconventional
sectors will still have to rely on financing through banks, grants
and corporate social responsibility initiatives. Therefore, there
is immense scope for Indian regulators to implement strategies to
provide private companies access larger capital resources for
funding climate change initiatives.
As per theannual report of BSE
for FY 2019-20, the total amount mobilized through green bonds at
BSE in was INR 18.03 billion FY 2019-20 and INR 8.65 billion in FY
2018-19. In only one year, there has been a significant jump in
green finance through green bonds from the domestic market. As the
market steers towards rewarding companies invested in conducting
business through ESG principles, it will be interesting to note how
policy makers address issues such as green washing, lack of
investor confidence, funding of unconventional green projects and
reduction in cost of green bonds so that green finance through
green bonds is viable for lesser established companies. Some
emerging green sectors which could significantly benefit through
issuance of green bonds are public transportation in particular
electric vehicles and solar energy. Policy makers may consider
providing benefits to companies in these emerging sectors to raise
funds in the global and domestic bonds markets to accelerate the
growth of these markets. This will help sectors other than core
energy projects to gain momentum through green finance and propel
India closer towards its INDC goals.
Originally published 16 July, 2021
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