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A THEORETICAL STUDY ON ROLE OF GREEN BONDS IN PROMOTING A SUSTAINABLE FUTURE FOR INDIA
Prof. Charmie Dalal
Assistant Professor, CPS-ATC, Indore
Abstract - Budget 2022 introduced the issue of Sovereign Green Bonds in public sector projects. India issued USD 6.11 billion in green bonds in 11 months of 2021. USD 11 million FDI inflows were seen in the non-conventional energy sector during 2020-21. India has the 4th largest installed capacity of renewable energy in the world. Keeping all this in mind and India’s ambitious renewable energy goals along with it, the country is on a path of change. Financing through Green Bonds can help India in promoting sustainability and reducing its carbon footprint. This paper reviews the penetration of green bonds in Indian markets and how it can help in promoting sustainability in India.
Keywords: Green Bond, Renewable Energy, Sustainability, etc.
1 INTRODUCTION
Green Bonds or Green Debt Securities as defined by SEBI Regulations are those debt securities, the funds raised through which are to be utilized for projects and/or assets falling under any of the flowing broad categories – renewable or sustainable energy, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable water management, sustainable land use, biodiversity conservation or any other category as the Board may specify (SEBI). In simple words, a green bond is like any other bond where a debt instrument is issued by an entity for raising funds from investors. However what differentiates a Green bond from other bonds is that the proceeds of a Green Bond offering are 'ear-marked' for use towards financing ‘green’ projects. (SEBI).
Combating climate change and promoting sustainable development has been on the agenda of governmental policies for a very long time. In COP21 – the United Nations Climate Change (UNFCC) conference – held in Paris in 2015 global economies committed to moving towards a low-carbon future. India also committed to reduce its greenhouse gas per gross domestic product by 33-35% till 2030. India set a target of achieving 175 Giga Watts (GW) of renewable energy by the end of 2022 and 500 Giga Watts of renewable energy by the end of the year 2030. India’s installed renewable energy capacity stands at more than 151.4 Giga Watts as on 31st December 2021.
In order to achieve this ambitious target, India has allowed 100% FDI under the automatic route for projects relating to generation and distribution of renewable energy. For meeting these goals India will need financing of at least USD 2.5 trillion. With this in mind, SEBI introduced regulations for issue of green bonds in India, so as to help finance these green projects. Indian markets helped raise $ 6.11 billion in green bonds in 11 months of 2021. The government further plans to raise another $ 3.3 billion in sovereign green bonds to finance renewable energy projects as the country moves towards being a low-carbon emitting economy.
Indian renewable energy companies raised INR 17.6 billion debt in the month of February 2021 alone. India ranks third in greenhouse gas emission in the world and has planned to take corrective actions in a systematic manner. In this context, Indian Renewable Energy Development Agency (IREDA), a government-backed agency was set up as the first Green Bank in India to promote clean energy investments and to accelerate the green finance for environment-friendly sustainable development.
Green bonds may be issued by a sovereign entity, inter-governmental groups or alliances and corporate entities with the aim to utilize the bond proceeds for projects which are environmentally sustainable. Green bonds entered Indian markets in 2015 with an average maturity period of 5 to 10 years. However, the average coupon rates of Green bonds remained higher than bonds Corporate & Government bonds with similar maturities. This adds burden to the issuer, while it makes bonds more attractive for the investors. Most green bonds issued were denominated in USD and were listed on India INX Exchange and NSE IFSC Exchange. The major issuers of these bonds were Yes Bank Ltd. (2015), Indian Renewable Energy Development Agency Ltd. (2017, 2018, 2019), Rural Electrification
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Corporation Limited or REC Ltd. (2017), Power Finance Corporation Ltd. (2017, 2021), Indian Railway Finance Corporation Ltd. (2017, 2022), Adani Renewable Energy Ltd. (2019), ReNew Power Pvt. Ltd., State Bank of India, among others.
1.1 Background
Indian regulator of securities market (SEBI) issued a concept paper for issuance of Green Bonds in Indian markets in 2015. The trend was started by World Bank in 2008, when it issued the world’s first green bond for raising funds to finance projects focused on climate improvement.
A green bond is like any other bond where a debt instrument is issued by an entity for raising funds from investors which are earmarked for financing green projects. In India, Yes Bank became the first entity in 2015, to have issued a green bond in India. While there were no set guidelines or regulations for the issue of green bonds till then, International Capital Market Association (ICMA) came out with Green Bond Principles in 2015. In order to overcome this gap in regulation, SEBI issued the Disclosure Requirements for Issuance and Listing of Green Debt Securities, 2017.
2 REVIEW OF LITERATURE
(Clapp, 2017) in their study on ‘Green Bonds and Climate Finance’ elaborates the use of environmental labeling to traditional bonds for financing green and climate projects. They also studied the development of the green bond market in recent years, the issuers of green bonds, the extent of financing they can provide and future prospects for growth. The case of Johannesburg, the first city in an emerging country to issue a green bond, is examined for potential replication. Challenges and opportunities relating to green bond demonstration and governance, de-risking, and green integrity are also explored in this study.
(Agliardi, 2019) conducted a study on ‘Financing environmentally-sustainable projects with green bonds’ through which he explained the pricing of green bonds and its dynamics. He also studied the difference between the yields on a conventional bond and a green bond having similar characteristics. They elaborated on valuation of green bonds, enhancement of issuer’s credit quality and cost of raising finance through green bonds as against the traditional modes of financing. The study also covered aspects of behavioural finance as they studied the effect of investors' environmental concern on their portfolio allocation. The findings of their study showed that the cost of capital could be reduced by improving credit quality of the green bond issue. It also suggested that tax incentives by the government along with investor awareness programs could help in bringing more investment into the green bond market.
(Saurabh Ghosh, 2021) in their study on ‘Green Finance in India: Progress and Challenges’ enumerated the growing importance of Green finance in developing countries like India to support the public policies of the government. The paper reviews the recent developments in green financing at a global level while focusing mainly on India. They studied the awareness of the public about green financing with the help of modern. Their study shows that awareness about green financing has improved substantially and it could lead us to a greener and more sustainable long term economic growth.
(PRAKASH, 2021) in their study named ‘Green Bonds driving Sustainable transition in Asian Economies: The Case of India’ investigated the financing gap for green projects and the potential of green bonds to bridge this gap in financing which will help India in achieving their Sustainable Development Goals. The study also elaborates the policy environment for issue of green bonds and recommends deepening of the corporate fixed income securities market to make green bonds a viable financing option for achieving India’s SDG goals.
(Verma, 2020) in their research paper titled ‘A Study of Green Bond Market in India:
A Critical Review’ explained Green bonds and the importance of Socially Responsible Investing (SRI) through investing in Energy Efficiency, Green Infrastructure, Renewable Energy and Water Improvement. They also shed light on the current scenario of green bonds in India and gave practical suggestions for its growth in the Indian markets.
VOLUME: 09, Special Issue 04, (IC-SPIPS-2022), Paper id-IJIERM-IX-IV, May 2022 69 2.1 Objectives
The objectives of this study on ‘A Theoretical Study on Role of Green Bonds in promoting a Sustainable Future for India’ were as follows:
1.
To understand about Green Bonds.2.
To understand the role of green bonds in sustainable development.3.
To understand the penetration of Green Bonds in the context of the Indian Sub- Continent.4.
To assess Green Bond as a viable financing option.3 FINDINGS
During the course of study of this paper the following things were observed:
1. Green Bonds have formed their niche as the regulatory guidelines for made way for the issue and listing of these bonds and awareness about green financing and green projects have increased. Conceptual clarity and simplistic definitions have made green bond an investor friendly proposition.
2. The government initiatives have brought this form of financing into the limelight, as the Finance Minister’s budgetary announcement for the launch of sovereign green bonds have made it a buzz word. Green bonds will go a long way in shaping India’s dream economy supported by sustainability.
3. The penetration of green bonds is at its initial stage, as a few Indian companies have issued these bonds. The scope for this kind of project financing is huge and it can support the renewable energy sector along with many other idealistic projects which will make India a low-carbon emitting economy.
4. The cost of financing through green bonds is comparatively higher as of now. This can act as a drawback for the issuers, but is also a positive sign for the investors who will be drawn towards sustainability by improving their portfolio return. This in turn, will help issuers in improving their goodwill in the long run, while giving them better pricing options in the market for financing.
3.1 Limitations
In this comprehensive study the following limitations were observed:
1. The study is theoretical in nature.
2. The study is limited to the India.
3. Green bonds are a relatively new concept; hence there is dearth of literature.
4 SUGGESTIONS
The market for Green bonds is very promising but not without its drawbacks. For green bonds to become a more viable financing option, the government may support the industry and investors by incentivizing the investments in these bonds. A rebate in tax could be an incentive provided to the issuers. Also, a tax credit system whereby the investor may receive income tax credit in place of payment of interest on these bonds could give boost in demand for these bonds. This in turn will help in developing the green bond market. Likewise, deduction on Long Term Capital Gains through Capital Gain bonds, which are currently issued to NHAI and RECL Bonds, can also be issued for Green Bonds. Credit rating of green bonds could be done through a separate rating scale and an independent mechanism can be set up for it by Credit Rating Agencies. This will give authenticity to the ratings and a clear insight into the usage of funds earmarked for green projects.
5 CONCLUSION
The prominence of investing in a sustainable future for the generations to come has never been this peaked. With pleasant ambitions of producing 175 GW power by renewable energy by 2022, if India does not strive to achieve this target now, the future generations will have to bear the brunt of our actions. Climate change is real and its effects have started to surface. The sooner we realize this and act upon it, the better. With the government being the torch bearer in taking systematic action, green bonds have a huge opportunity to deepen their market penetration and help achieve the sustainable development goals. As green bonds are a primary source of long term financing and provide convenient cost of
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capital for green project developers, green bonds have a huge potential to tap the market.
Lack of awareness is also one of the main impediments to these bonds. Therefore, the government needs to organize campaigns to promote awareness about green bonds, making people realize about their share of participation in protecting their environment. Hence the role of SEBI still remains pivotal in increasing transparency, creating awareness and keeping a check on the reporting requirements of the issuers.
REFERENCES
1. Agliardi, E., & Agliardi, R. (2019). Financing environmentally-sustainable projects with green bonds. Environment and development economics, 24(6), 608-623. (Agliardi, 2019)
2. Clapp, C., & Pillay, K. (2017). Green bonds and climate finance. In Climate Finance: Theory and Practice (pp.
79-105). (Clapp, 2017)
3. https://www.investindia.gov.in/sector/renewable-energy
4. https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond- principles-gbp/
5. https://www.sebi.gov.in/sebi_data/meetingfiles/1453349548574-a.pdf
6. https://economictimes.indiatimes.com/markets/bonds/decoding-green-bonds-india-market-and-how-to- invest-in-it/articleshow/90230488.cms
7. https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/04AR_2101202185D9B6905ADD465CB7DD280B88266F7 7.PDF
8. https://www.financialexpress.com/market/sovereign-green-bonds-india-has-latched-on-to-global- trend/2446266/
9. https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of- green-debt-securities_34988.html
10. PRAKASH, N., & SETHI, M. (2021). Green Bonds Driving Sustainable Transition in Asian Economies: The Case of India. The Journal of Asian Finance, Economics, and Business, 8(1), 723-732. (PRAKASH, 2021) 11. Verma, A., & Agarwal, R. (2020, April). A study of green bond market in India: A critical review. In IOP
Conference Series: Materials Science and Engineering (Vol. 804, No. 1, p. 012052). IOP Publishing. (Verma, 2020)
