Government-mandated sustainability disclosure standards are vital for investor confidence in green bonds, streamlining issuance and enhancing reliability
Green bonds are essential for funding or refinancing projects that reduce business impact on the environment or climate. They were typically used to raise money for projects like clean transportation, eco-friendly farming, renewable energy, and other environmental infrastructure projects. The Leaders' Declaration, signed last July at the G20 Summit under India's presidency, pledged to triple global renewable energy capacity by 2030. India has pledged to reduce current emissions by 2030 and achieve net zero status by 2070.
According to Climate Bonds' data, India is the sixth-largest issuer of green, social, sustainable, sustainability-linked, and transition bonds (GSS+) in the Asia Pacific Region. Climate Bonds reported GSS+ bonds totaling $323.7 billion from 43 sovereigns by the end of 2022. India’s 2030 climate targets submitted under the Paris Agreement include reducing its economy’s emission intensity by 45 percent compared to 2005 and increasing the share of non-fossil fuel-based energy resources to half of the installed capacity.
As per Climate policy initiative, the green finance flows are at an average of $44 billion per year; however, this falls substantially short of the requirement as it is approximately only a fourth of India’s investment projections. As per India’s Nationally Determined Contributions (NDCs), the country requires approximately INR 162.5 lakh crores (USD 2.5 trillion) from 2015 to 2030, or roughly $170 billion per year.
The Role and Importance of Green Bonds in India's Financial Landscape
Green bonds are pivotal for India's sustainable development, financing green projects like renewable energy and eco-friendly infrastructure. They foster Public-Private Partnerships and incentivise corporate investment in sustainability. Most of the bonds were raised by a handful of big industrial companies, such as Greenko Group, Adani, REC, and the public bank SBI.
Indian issuers lead in green bond issuance among emerging Asian markets, excluding China. In FY 2024, the government is expected to raise INR 20,000 crores via sovereign green bonds, and the government has already sold INR 15000 crores so far despite a global slowdown in sustainability linked bonds amid raising interest rates. The funds raised can be used for climate risk mitigation and green initiatives to reduce carbon intensity.
The Current Landscape of Green Finance in India
Despite growing awareness of environmental issues and the importance of sustainable development, green finance has yet to gain significant traction in India. Several factors contribute to this, including the shallow nature of India's bond market, nascent regulatory frameworks, and companies' prioritisation of immediate sustainability goals over long-term, capital-intensive projects.
A.Expanding the Bond Market and Encouraging Green Lending
The shallow nature of India's bond market is a major impediment to promoting green finance. Banks dominate financial intermediation in India, and currently they have no specific mandates for green lending.
To address this, efforts should be made to expand the bond market and encourage green lending by banks. The RBI, in its FAQs published in Dec 2023 regarding the framework for acceptance of green deposits, clarified that green activities and projects financed under the framework can be classified under the priority sector if they meet the guidelines of the RBI.
The activities and projects listed in the framework are the same as those indicated in the Sovereign Green Bonds (SGrBs) framework; hence, investment by regulated entities in SGrBs is covered under the framework.
B.Enhancing transparency
The lack of a comprehensive disclosure framework was one of the limiting factors in the growth of green finance in India up until now. We are seeing increased disclosure requirements for banks. Banks need to start tracking their lending to green and transition risk activities for each business they lend. The recent climate disclosure framework guidelines released by the RBI are a step in the right direction as they foster an assessment of climate-related financial risks and opportunities.
C.Encouraging Ambitious ESG Goals
Many Indian companies are still establishing Environmental, Social, and Governance (ESG) goals. To create a favourable environment for green financing, it is critical to encourage companies to adopt ambitious ESG goals and support them with investments. Incentives such as tax breaks, subsidies, or preferential financing terms can encourage businesses to align their strategies with ESG objectives, resulting in increased investment in sustainable projects.
D.Implementing Financial Incentives and Support Mechanisms
The government has the potential to significantly accelerate the adoption of green financing using support mechanisms and financial incentives. This includes favourable interest rates, tax breaks, and subsidies for companies working on environmentally friendly projects. Public-private partnerships can also be used to establish green project-specific funds or financial instruments, which will increase their attractiveness to corporations.
E. Alignment and adherence to international standards
The sovereign bonds issued in India should adhere to international standards outlined by the United Nations, and the local regulations should align with global frameworks. This will improve investor confidence and transparency and help attract global capital to fund India’s green initiatives. Of particular importance will be post implementation audits to ensure the published outcomes are indeed being delivered.
The Global Experience with Green Bonds
From $36 billion in issuances in 2020 to $270 billion in 2020, the market for green bonds has experienced an incredible rise (World Economic Forum, 2023). Industries globally are increasingly embracing green capital amid a shift towards sustainability. India faces unique institutional and geographical challenges but can overcome them.
Developing nations like Egypt, Malaysia, Fiji, and Indonesia have embraced sovereign green bonds despite hurdles (World Bank, 2023). The UK Green Finance Institute drives green finance through partnerships with corporations, financial institutions, and governmental organisations.
Conclusion
Government-mandated sustainability disclosure standards are vital for investor confidence in green bonds, streamlining issuance, and enhancing reliability. India's impact on the global green bond market can significantly grow through collaborative efforts among governmental and regulatory bodies. Educating investors on sustainable investments' benefits and risks is crucial, fostering more funding for eco-friendly projects and advancing sustainable development.
(Ramnath Iyer is Co-Founder & CEO of ESGDS.)