Sovereign Green Bonds: Answer To India’s Rising Climate Finance Needs?

In recent times, India has been one of the few nations that has consistently walked the talk on climate action, with several concrete steps including a substantial expansion in Renewable Energy capacity. At the COP 26, India signalled further intent by setting a Net Zero deadline of 2070. This is an ambitious target and will entail significant mobilization of investments and innovative solutions. In this context, the Government’s recent announcement on issuing Sovereign Green Bonds has been welcomed as one that can generate a pool of dedicated & affordable capital that can catalyze India’s Green Transition and enable the ramping up of climate resilient infrastructure.

A Green Bond is a debt instrument whose proceeds are earmarked for financing new/existing climate friendly projects with the objective of reducing the carbon intensity of the economy. When issued by the Government (as opposed to FIs/Corporates) it is termed a Sovereign Green Bond. First introduced in 2007, Green Bonds have seen rising global popularity with Moody’s estimating the total volume of issuance at $775 Bn by 2022. ?Poland was the first to issue an SGB in 2016-17 and since then over 30 national Governments have followed suit with France, Germany and UK being the largest issuers. These evinced huge investor interest, being 8-12 times oversubscribed. While Europe has traditionally led issuance, in recent times we have seen many developing countries like Nigeria, Egypt, Thailand, Fiji also issue SGBs. Currently, sovereigns account for approximately 15 per cent of global green bond issuance.

Several factors can explain the steady growth in SGB Issuance. Firstly, more and more Governments are recognizing the urgency and importance of a low-carbon economy, as the perils of climate change become clearer. Secondly, under increasing pressure to meet their NDC pledges and commit to a Net Zero economy target, they are eyeing these bonds as a means of hastening their energy transition. Thirdly, with developed countries failing to honour their promise of financial assistance to developing economies, the latter are turning to SGBs to fund their decarbonization projects. Lastly, responsible investing is steadily gaining currency with several institutional investors opting to park their funds strictly in accordance with ESG criteria, thus elevating demand for SGBs.

While India has seen Green Bond issuance by private players like YES Bank, Axis Bank, IDBI and NTPC, Sovereign Green Bonds are a very first. India’s Green Bond market remains largely untapped, and it could become a trailblazer as none of the BRICS nations have yet issued SGBs. While the recent announcement has raised hopes of climate evangelists, the initial exuberance needs to be tempered. Truth is that India’s green bond market is still very nascent and there are several bottlenecks that can hinder its effectiveness. Besides, policy and regulatory uncertainties can severely dampen investor sentiments.

For a robust and credible SGB market, it is critical that the Government addresses the following challenges:

1.????Proceeds of an SGB must be solely invested in “green “projects but unfortunately, we do not have firm guidelines around what constitutes “green”. This lack of clarity means there is every chance of bond proceeds being diverted to “non-green” projects, or what we call “greenwashing”. This defeats the core purpose of Green Bonds and lowers its credibility. The Government must immediately develop a National Green Finance Taxonomy which will establish a list of economic activities and hence projects that are eligible for SGB funding. This will prevent any subjectivity in identifying projects that impact the environment favourably and thus attract more investment. The taxonomy should be in sync with India’s NDCs, SDGs and broad national circumstances and must be regularly reviewed and refreshed.

2.????Secondly, the Government must define watertight criteria for selecting projects under SGB funding. It must avoid tokenism and political considerations in project selection. Various Government ministries, agencies and both Centre and States must come out of their silos and work together, to select the most deserving projects. Not all green projects may have the same decarbonization potential, so some sort of prioritization may be necessary. In my opinion, the proceeds of SGB issuance must be channelized towards:

a)????Accelerating investments in RE, grid infrastructure and Energy Efficiency

b)????Backing nascent clean technologies with massive carbon mitigation or adaptation potential – such as Storage, Green Hydrogen, Carbon Capture. At an early stage, these are often too risky or commercially unviable for private capital owing to high upfront costs and hence need public funding.

c)????Decarbonizing the transport sector by fast tracking electric vehicles and setting up a nationwide network of charging infrastructure

d)????Building climate resilient core public infrastructure (eg. roads, bridges, power transmission) in areas at high risk of being impacted by Climate change, e.g. low-lying coastal areas. This is important given the relatively higher concentration of population in India that is vulnerable to climate change and the fact that this sector typically fails to attract private capital given its public good nature.

3.????Lastly, the Government needs to ensure transparency by instituting a mechanism for regular monitoring by an independent entity – with elaborate reporting on the management of funds and rationale for selecting projects. ?A third-party review and verification is necessary to inspire confidence amongst investors that the funds are being rightly utilized.