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India faces a crucial challenge—it must balance its rapid growth and poverty alleviation alongside its environmental commitments. A robust Indian green bond market can significantly finance the country’s ambitious Nationally Determined Contribution (NDC) to the Paris Agreement.
Green bonds and the Indian green bond landscape
Green bonds and traditional bonds function identically, except the proceeds from green bonds can only be used to finance climate adaptation and mitigation projects. The International Capital Market Association’s (ICMA) Green Bonds Principles outline eligible projects to be funded by green bonds. In India, SEBI issued green bond guidelines in 2017, and in 2023, the government developed its Framework for Sovereign Green Bonds, both of which are consistent with the ICMA international guidelines. On 25 January 2023, India issued the first tranche of its sovereign bond worth INR 80 billion, followed by the same issuance on 9 February. This marks a significant turning point in the country’s commitment to expanding renewable energy production and reducing its carbon intensity.
In India, SEBI issued green bond guidelines in 2017, and in 2023, the government developed its Framework for Sovereign Green Bonds, both of which are consistent with the ICMA international guidelines.
More recently, the Reserve Bank of India (RBI) opened the door for foreign investment in sovereign green bonds. This introduction increases the pool of potential investors. A wider investor base could also improve the liquidity of green bonds, making them more attractive for both foreign and domestic investors.
Corporate green bonds make up the majority of issuance in the country. Indian green bond issuances reached a total value of US$21 billion in February 2023, of which the private sector was responsible for 84 percent. Sovereign and government agencies were responsible for 14 percent of the total issuances in February 2023, demonstrating a considerable difference between the public and private sector abilities. The recency of the sovereign green bond market means that certain frameworks are relatively underdeveloped. Additionally, private corporations are able to align and tailor their projects with investor interests—this flexibility makes them a more attractive option for investments. These investments are primarily focused on three areas. In renewable energy, bonds are being issued to finance projects in solar, wind and hydro projects. Additionally, green bond investments are being made in developing energy-efficient projects and technologies across a variety of sectors. Finally, green bond proceeds are being used for sustainable transportation projects—electric vehicles, public transportation, and related infrastructure. These projects further demonstrate the private and public sectors’ determination to shift towards sustainable practices without compromising economic growth.
Green bond investments are being made in developing energy-efficient projects and technologies across a variety of sectors.
Though municipal issuances currently occupy only 0.1 percent of Indian green bond issuances, they hold great potential. The Vadodara municipal corporation in Gujarat became the first city in Asia to issue a certified green municipal bond in 2023. Additionally, the Indore Municipal Corporation issued its first green bonds in February 2023 for the installation and operation of a solar power plant of 60 megawatts. The civic body’s green bonds were oversubscribed by 5.90 times, raising 720 crore INR instead of the planned 244 crore INR.
Key challenges and areas for improvement
Despite these initiatives leading India in the right direction, certain concerns linger. India’s US$21 billion in green bonds represents a mere 2.2 percent of global issuances in 2023, despite its large economy and emissions. Of this, sovereign green bonds raised approximately US$1.94 billion (16,000 crore INR) in 2023, with the aim to raise US$2.44 billion (20,000 crore INR) in 2024.
A sustainability-oriented business culture
The government must look towards structural changes to increase its sovereign issuances. In April, the Reserve Bank of India (RBI) accepted no bids at the sale of the first sovereign green bond auction of the financial year. Bond traders speculate that this decision was because investors were unwilling to pay the premium (“greenium”) usually associated with green bonds. Globally, investors are usually willing to accept lower returns for green bonds, as the funds raised are meant for environmentally friendly purposes.
Strong public-private linkages in sustainable finance have helped issuers and investors find common ground.
The achievement of Scandinavian nations in creating an investor base can be attributed to a robust business culture which prioritises sustainability-oriented investments. In Sweden, for example, mandates require corporations to direct attention towards sustainability. In turn, these companies encourage investment in green bonds to fund their climate practices. Additionally, strong public-private linkages in sustainable finance have helped issuers and investors find common ground. Similarly, to develop the green bond market, the Indian government must raise awareness and encourage a sustainability-oriented business culture. The Business Responsibility and Sustainability Reporting (BRSR) guidelines, established by SEBI in 2021, require listed companies to disclose their sustainability performance based on several different indicators. This step has been important in measuring and encouraging businesses to prioritise sustainability and create a business culture based on it. This top-down approach will bring more issuers into the green bond market and develop a favourable market for investors.
Increased transparency and visibility
Another challenge in the proliferation of India’s green bond market is the lack of transparency, visibility, and communication. Augmenting transparency is critical to build an investor-issuer relationship. Presently, limited human and technical resources prevent robust reporting and verification processes, thereby limiting investor confidence. That being said, the recent release of the Framework for Sovereign Bonds by SEBI mandates transparency in green bond issuance and has cemented mechanisms for external reviews as part of the process of issuing green bonds. Thus, issues in transparency likely fall at the implementation level, as opposed to the policy level.
By increasing transparency in green bond issuances and allocation of proceeds, investors are more likely to feel secure in their decisions, thereby generating larger bottom-up green bond demand.
Brazil’s evolving market is the largest corporate green bond issuer in its region, with remarkable successes in a broad and growing investor base. This success can be attributed to a transparent green bond framework that establishes a green bond taxonomy by defining the processes for selecting eligible expenses, monitoring and measuring bonds, and external verification. Mirroring this, India could develop a green bond taxonomy that would help with the implementation of transparency measures outlined in the SEBI framework. By increasing transparency in green bond issuances and allocation of proceeds, investors are more likely to feel secure in their decisions, thereby generating larger bottom-up green bond demand.
Focus on developing municipality-level green bonds
Greater focus on municipality-level green bonds can accelerate climate adaptation and mitigation programmes. Given the size and number of municipalities in India, green bond issuances could significantly increase the scale of capital mobilised at local levels. However, this potential is hindered due to a lack of awareness and understanding of green bonds among municipal personnel. Many are not equipped to understand the complexity of these financial instruments. Additionally, limited state capacities—in human and financial capital—mean that the introduction of green bonds would further strain state resources. To attract investors, municipal corporations must demonstrate strong managerial capabilities and the ability to recover bond costs. Building on the steps taken in Vadodara and Indore, India must continue to leverage the number of municipalities it has to its advantage and focus on accelerating municipality green bond issuances to diversify its bond market.
To attract investors, municipal corporations must demonstrate strong managerial capabilities and the ability to recover bond costs.
A comparative study between Norway and Sweden revealed that Sweden’s relative success in green bonds can be attributed to the number of municipalities wherein it can issue bonds. Municipalities in Sweden have developed individual frameworks and guidelines for the issuance of green bonds. Region Stockholm, for example, developed a framework specific to the Greater Stockholm area to define eligible projects, allocation of proceeds, and reporting methods. These guidelines are based on the region's specific sustainability goals while taking into consideration its climate, and economic and social environment.
India’s green bond market could expand by capitalising on its populous and energy-intensive regions. This could be done by encouraging municipalities to develop localised and region-specific green bond frameworks that take into account the environment, climate, and natural resources as well as their most energy-intensive sectors. This would develop existing municipality green bond issuances and support municipalities looking to issue green bonds for the first time.
Conclusion
India’s green bond market, particularly in the sovereign segment, is still in its early stages. While issuances are increasing and ambitious goals have been set, sustained growth will depend on strong leadership from both the government and financial institutions. Green bond issuance is more likely to thrive when the government shows a clear and consistent commitment to sustainability in its public policy and financial market strategies, as demonstrated by recent sovereign green bond issuances. Financial institutions must also continue their current momentum and lead the charge in advancing green bond issuance and sustainability efforts.
Naisha Deora is a Research Intern at the Observer Research Foundation
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