Dibyojit Mukherjee and Rohit Akundi
Law students at Damodaram Sanjivayya National Law University
I. Introduction
In recent years, India has taken various measures at both state and national levels to shorten its gap between economic growth and environmental sustainability. As India is still a developing country and has a huge population to look for, India faces a great threat of environmental challenges. To cater to these climate-oriented consequences, India has taken various initiatives like- the National Action Plan on Climate Change (NAPCC), Namami Gange, National Clean Air Programme, National Hydrogen Mission etc.[1]
But it requires a huge chunk of money to start building infrastructure and operate these green projects. One of the solutions to raise money is by issuing green bonds and raise money from investors. We had to wait another 7 years till 1st Feb 2022, when Indian Finance Minister Nirmala Sitaraman announced that India will also issue Sovereign Green Bonds to mobilise private capital for sustainable development.[2]
While Sovereign Green Bonds (“SGrB”) issuance is a relatively new phenomenon, many companies have been issuing corporate green bonds long on and it has been a great success. India is the second largest issuer of corporate green bonds amongst the emerging economies, after China.
II. Legal Framework of Sovereign Green Bonds:
India took various initiatives to fulfil its commitment and targets set in the Paris Agreement of balancing environmental sustainability with economic growth. As discussed above, these initiatives are aimed at lowering India’s carbon intensity level. And to take action against carbon intensity levels India introduced five nectar elements, also known as Panchamrit.
As a step towards fulfilling this objective, the Finance Minister of India Smt. Nirmala Sitharaman in the Union Budget 2022-23, declared that apart from the direct investment in public sector projects, they would issue SGrBs as per its overall market borrowing. To regulate SGrB in India, the government also introduced a uniform framework that applies to all the SGrBs issued by GOI.[3] These four principles or core components are-
A. Use of Proceeds:
The central government would use the proceeds, being collected from the Sovereign Green Bonds to fund green infrastructure projects. As per the framework, the government will only classify those projects as ‘green projects’ that increase energy efficiency in resource mobilization, decrease carbon & greenhouse gas emissions, safeguard climate goals and abide by sustainable development goal principles.[4]
All eligible projects can get funding from the government through various forms like- investment, granted aids, tax exemption, selected operational expenditures, subsidies or research & development grants. To a certain broader extent, the central government has identified some eligible categories of projects and their eligibility criteria. These are the renewable energy sector, climate change, clean transportation etc.[5]
Under the new regulation, the Issue Proceeds cannot be used towards expenditures that occurred before more than 12 months of the issuance. There is also mention of some project areas that are strictly excluded from the ambit of SGrB. These are fossil fuels, nuclear power grids, direct water incineration, hydropower plants larger than 25 MW, Landfill projects, biomass or palm oil industries. However, in the fossil fuel sector, investments in cleaner compressed natural gas are allowed for public transportation only.
B. Process for Project Evaluation and Selection:
The Ministry of Finance is responsible for the selection and evaluation of green projects. To assist the ministry, they have created the ‘Green Finance Working Committee’, also known as GFWC which is chaired by the Chief Economic Adviser of the Government of India. The ministry will also take help from experts concerned with particular areas before the evaluation of projects.[6]
The GFWC has complete authority in making decisions for the issuance of Sovereign green bonds. Some important members of this GFWC are members from implementing departments, Niti Aayog, Budget Division of the Department of Economic Affairs, Ministry of Environment, Forest and Climate Change. GFWC can also choose additional members from other ministries based on its requirements. The committee will select those green projects that come under the list of eligible projects. Then the committee will review it and in case of approval, will give the green signal for funding. The relevant and concerned ministries or departments will conduct a thorough evaluation of potential green projects according to the list of eligible project areas under the framework of SGrB.[7]
GFWC along with different ministries will take the initiative to spread awareness towards sustainability. Then for successive years, GFWC will identify a new set of regulations. The Ministry of Finance will consult with the Reserve Bank of India, once the Finance Bill is passed.[8] There they would decide the amount of money required for eligible green projects and how much proceeds can be raised through the issuance of Sovereign Green Bond. The Ministry of Finance will also keep track of how funds are allocated in a particular project and inform RBI about any remaining funds that will be used in financing other green projects through another round of issuance.[9]
GFWC only selects those projects that align with India’s climate goals and the United Nations Sustainable Development Goals. The eligible green projects are also marked in accordance with the objectives of ICMA Green Bond principles. These need to be aligned with the objectives of National Environmental Policy, Policy Statement on Abatement of Pollution etc. These expenditures must be also adhered to by the respective state’s environmental objectives.
C. Management of Proceeds:
The fund raised through Sovereign Green Bond is deposited to the Consolidated Fund of India as per the regular treasury policy.[10] Upon selecting the eligible green infrastructure project, the fund from the consolidated fund will be made available. To uplift transparency in this accounting process and smooth accounting, the Ministry of Finance is required to maintain a whole separate account. The ministry is also required to set up a dedicated information system or maintain a ‘Green Register’ that would include information regarding the issuance of green bonds, proceeds generated, details of eligible projects, allocation of proceeds etc.
The Public Debt Management Cell would administer and keep track of proceeds raised from green bonds and monitor the allocation towards green infrastructure projects. In case of any unallocated proceeds, the fund will be transferred to eligible proceeds in successive years.[11]
D. Reporting:
The central government is bound to provide transparent reporting of the allocation of funds through SGrB to the investors. They also need to be informed about the environmental impact of the projects funded by sovereign green bonds.[12] Usually, this report will be circulated annually. But if there some certain changes in the allocation of proceeds after the publication of the report, it will be brought under the supervision of the Green Finance Working Committee.
This annual report will contain information about bond issuance, a list of eligible projects, the method of utilizing funds, the amount of allocation to individual projects, the impact of the project in promoting SDGs, the quantum of unallocated proceeds etc.[13] India has a Comptroller and Auditor General who are responsible for auditing all expenditures of both central and State Governments. So, the allocation of proceeds raised under sovereign green bonds is also placed under the supervision of audit by CAG. These audit reports regarding SGrB will also be placed before parliament.
III. Some Lessons India Must Keep in Mind
India is not the first country to enter the green bond market, let alone sovereign green bonds. By time of RBI’s fist issuance, 25 other countries have already issued sovereign green bonds including the likes of emerging economies like Chile, Indonesia etc. While India does not have the first mover advantage, it does benefit from learnings of other countries. For instance, Singapore witnessed oversubscription largely due to an eligibility criteria that developed in consonance with internationally recognised market principles such as that of the ICMA.
Second, India is also better positioned to understand and take advantage of the concept of ‘greenium’. ‘Greenium’ can be understood as the saving an issuer will enjoy on the cost of borrowing because of issuing a green bond rather than a conventional bond.[14] It is because of this concept that sovereign green bonds also command a higher price as opposed to conventional bonds.
Third, green bonds command a higher price because they help investors de-risk. Convincing investors that the funds raised through the issuance of green bonds will be allocated exclusively to green projects is a significant challenge. Experiences of other countries shows that this might necessitate budget tagging to boost investor confidence.
IV. Impact of Sovereign Green Bond in Achieving India’s SDG
The introduction of sovereign green bonds in India has had a significant impact on the country's sustainable development goals. Article 48-A of the Indian Constitution safeguards wildlife and forests along with the protection and improvement of the environment. The issuance of sovereign green bonds allows India to tap into finance from investors for public sector projects focused on environmental sustainability, such as renewable energy, energy efficiency, and pollution control.[15] The proceeds from these bonds are allocated to eligible projects, which are associated with the environmental objectives of the ICMA Green Bond Principles and the UN Sustainable Development Goals.[16] The issuance of sovereign green bonds in India has the potential to help the country meet its climate targets, as set under the Paris Agreement, by financing projects that contribute to reducing the carbon intensity of the economy. It also supports the government's efforts to promote sustainable development and meet the SDGs.[17]
Investment in green sectors through sovereign green bonds is particularly important to achieve net zero carbon emission by 2070. Bond proceeds will be also used in projects like sustainable water and waste management, energy efficiency, sustainable management of natural resources, and aquatic biodiversity conservation. These include building a systematic program of repeat sovereign issuances to boost investor confidence, fostering dialogue to grow local currency debt by emerging market sovereign issuers, and ensuring transparency over the end-use of proceeds.[18] The major updated Nationally Determined Contributions (NDC) that India plans to achieve by 2030 are-
· Increase non-fossil fuel-based energy to 50% of the total installed electricity capacity.
· Reduce emission intensity of GDP by 45% of the 2005 levels.[19]
The sovereign green bonds would help the government to fund its ambitious green projects to achieve NDC by tapping the domestic investors protecting it from forex exposure. Also by issuing sovereign green bonds, India is showcasing its commitment towards sustainable development that would create a positive impact on India’s credit rating. It would further facilitate access to capital from foreign institutions and also secure lower interest rates debts from international organizations. India is in the middle of the process of expanding infrastructures and green bonds are the most impactful way to build and achieve its climate action-related targets in an environmentally responsible way.[20] India is one of the most vulnerable countries that will be badly hit by climate change and suffer from crop failures, extreme weather events, energy crises, floods, drought, rising sea levels etc. Sovereign Green Bonds will help the Indian Government finance projects that will mitigate these risks and promote a holistic living environment for its citizens. The availability of accessible and affordable finance through these bonds is essential for India's green transition, especially considering the significant financing gap to achieve net zero targets by 2030.[21] India's sovereign green bonds are instrumental in driving sustainable finance and supporting the country's efforts towards achieving its UNSDG goals by financing environmentally friendly projects and promoting green growth.
V. Marketing Green Bonds
The task at hand is marketing green bonds as a viable opportunity for both investors and governments. Between 2014 and March of 2023 India had raised a cumulative of $43 billion through the issuance of green bonds of which approximately ₹16,000 was sourced through the issue of sovereign green bonds in FY 2022-23. Furthermore, the budget of FY 24 suggested the possibility of borrowing an additional ₹20,000 crore which was sought to be achieved in a phased manner.[22] The first of these issues, of ₹5000 crore in November 2023 sailed through and additional issuances are expected in the first half of 2024.[23] While these numbers seem encouraging there remains potential to increase the funds sourced through issuance of green bonds. Policy actions therefore become necessary to incentivise investors among others motivators to purchase green bonds.
1. Development of Priority List of Strategic Green Developments: The Development of a priority list for green projects, which categorically classifies projects based on their importance can help in the speedy marketing of bonds.[24]
This list will provide investors with access to low-carbon and climate-flexible investment opportunities.
2. Ensuring Financial Viability of Projects: Any way to make projects more financially viable will attract investors. This is not specific only to the bond market but to any source of finance as a whole. Apart from ensuring stricter compliance with project plans the government can also consider public-private partnerships as an opportunity to boost investor interest.[25]
3. Pipeline Transparency for Investors: Providing investors with an attractive pipeline of projects that may benefit them may motivate them to invest in the bonds. If a strong pipeline of attractive projects exists then investors are more eager to invest. This in turn creates a cycle wherein the pipeline incentivises the investors and the investors incentivise the furtherance of infrastructural expenditure.[26]
4. Establishment of Collaborative Platform for Governments, Investors and Development Banks: Forging a collaborative platform between institutional investors, development banks and private sector investors keen to decrease their carbon footprint can help market green bonds. For instance in Asia, the Asian Infrastructure Investment Bank collaborates with governments to decrease their carbon footprint.[27]
Other motivators can include green bond grants and tax incentives which are especially beneficial to the private sector.
VI. Conclusion
India’s financial and fiscal landscape is changing rapidly. India is now focusing more and more on promoting a balance between economic growth and environmental sustainability. The introduction of a sovereign green bond framework and issuance of these bonds is a major step for the Indian government to create a positive environmental impact.[28] Apart from that the Indian Government has taken several steps to promote sustainable living with climate management, including the launch of a green bond market, the release of a framework for sovereign green bonds, public-private partnerships in green infrastructure projects, issuance of sovereign green bonds etc.[29] The Government’s efforts to promote environmental sustainability have been so far successful in raising funds through sovereign green bonds. Though the fundamental objective of SGrBs in India is to finance green infrastructures or climate-related projects including both research and heavy projects, they can be also used to raise funds to counter energy crises, clean transportation and other environmental infrastructure projects. As India is more serious about sustainable development goals, more and more stringent regulations are being implemented to safeguard both investor’s interests and climate goals.[30] Sovereign Green Bonds can help investors diversify their investments into sustainable projects. But if India wants to achieve its UN sustainable development goals, it has to promote these more to retail investors. Retail investors have to be aware of the climate crisis and sustainable living so that SGrBs don’t become a mere investment option to them. To boost confidence and create trust amongst them, India needs to come up with some regulations regarding sustainable information disclosure regarding the management of funds and details regarding green infrastructure projects. The Government also needs to implement a third-party, independent credit rating system that gives unique ratings to every project, like other corporate bonds so that it could be much easier for investors to choose.
[1] Shivananda Shetty, ‘India’s Debut Sovereign Green Bond Framework: A Step towards Bridging India’s Climate Financing Gap - KPMG India’ (KPMG, 19 October 2023) <https://kpmg.com/in/en/home/insights/2022/12/india-debut-sovereign-green-bond-framework.html> accessed 28 January 2024.
[2] ibid.
[3] Department of Economic Affairs, ‘Framework for Sovereign Green Bonds’.
[4] ibid.
[5] ibid.
[6] ibid.
[7] ibid.
[8] ibid.
[9] ibid.
[10] ibid.
[11] ibid.
[12] ibid.
[13] ibid.
[14] ‘Sovereign Green Bonds: What Role Can They Play in the Transition to Net Zero? - King’s College London’ <https://www.kcl.ac.uk/news/sovereign-green-bonds-what-role-can-they-play-in-the-transition-to-net-zero> accessed 28 February 2024.
[15] ‘India Incorporates Green Bonds into Its Climate Finance Strategy’ (6 December 2023) <https://blogs.worldbank.org/climatechange/india-incorporates-green-bonds-its-climate-finance-strategy> accessed 28 January 2024.
[16] Khaitan & Co, ‘Government Of India Introduces The Framework For Sovereign Green Bonds’ (Khaitan & Co) <c> accessed 28 January 2024.
[17] Department of Economic Affairs (n 3).
[18] Shetty (n 1).
[19] ‘India Achieves Two Targets of Nationally Determined Contribution Well Ahead of the Time’ <https://pib.gov.in/pib.gov.in/Pressreleaseshare.aspx?PRID=1987752> accessed 3 June 2024.
[20] ‘Sovereign Green Bonds: What Role Can They Play in the Transition to Net Zero? - King’s College London’ (n 14).
[21] Dr Satyendra Kumar and CA Lalit Kundalia, ‘Green Bonds - Role and Scope in India’s Financial and Fiscal Landscape’ <https://www.iibf.org.in/documents/BankQuest/6.%20.pdf> accessed 28 January 2024.
[22] Rhik Kundu, ‘Govt May Issue Sovereign Green Bonds in Second Half of FY25’ (mint, 2 January 2024) <https://www.livemint.com/market/govt-may-issue-sovereign-green-bonds-in-second-half-of-fy25-11706794445378.html> accessed 28 February 2024.
[23] ‘First Sovereign Green Bond of FY24 Sails through amid Thin Greenium | News on Markets - Business Standard’ (10 November 2023) <https://www.business-standard.com/markets/news/first-sovereign-green-bond-of-fy24-sails-through-amid-thin-greenium-123111001163_1.html> accessed 28 February 2024.
[24] Pawan Kumar Chugan, Yogesh Mungra and Kathak Mehta, ‘Challenges and Policy Implications for Marketing Green Bonds’ <https://papers.ssrn.com/abstract=2937627> accessed 28 February 2024.
[25] ibid.
[26] ibid.
[27] ibid.
[28] Kumar and Kundalia (n 21).
[29] ‘India Incorporates Green Bonds into Its Climate Finance Strategy’ (n 15).
[30] ‘India’s Sovereign Green Bonds: Steps for Building on a Successful Debut’ (Grantham Research Institute on climate change and the environment) <https://www.lse.ac.uk/granthaminstitute/news/indias-sovereign-green-bonds-steps-for-building-on-a-successful-debut/> accessed 28 January 2024.
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