By Suresh Darak
Zero: India’s commitment for net emissions by 2070. This ambitious goal to achieve carbon neutrality requires significant investments in clean technologies, a radical shift from fossil fuels to alternatives, and the development of sustainable infrastructure. None of this will be possible unless we accelerate funding of climate control initiatives.
As per a Bloomberg NEF report India needs ~$12.7 Tn to achieve Net Zero, and not all can be financed by the public sector or by banks. It will necessitate the mobilisation of funds from private finance, institutional investment and global funds. This is where green bonds come in.
What Are Green Bonds?
Green bonds are similar to traditional bonds, with the same financial characteristics such as seniority, maturity, ratings, and interest rates. The key difference is that the money raised from green bonds can be used only to finance climate adaptation and mitigation projects such as renewable power, sustainable transportation (electric vehicles, public transport) and climate-resilient agriculture.
Globally the first green bonds were issued in 2007 and gained traction with the 2015 Paris Agreement on Climate Change. Green bond issuance has crossed $500 billion in 2023, according to S&P Global. Closer to home, SEBI issued green bond guidelines in 2017, following up with the Framework for Sovereign Green Bonds in 2023, and both being consistent with international guidelines. In January 2023, India issued the first sovereign green bond of Rs 8000 Cr. Moreover, in April 2024, RBI widened the door for foreign investment in Sovereign Green Bonds through the International Financial Services Centre.
What’s The Current State?
However, the green bond market is still at a nascent stage in India and is yet to find appeal amongst investors. As per ORF, green bond issuances in India stand at ~$21Bn, which is a fraction both of the overall Indian bond market of $2.5 Tn and of the investment needed for net zero goals mentioned earlier.
These green bond issuances have been led by the private sector which contributed 84 per cent, while Sovereign and Government agencies were responsible for 14 per cent of the total issuances. Recent auctions of sovereign green bonds have been tepid. In last week’s Rs 5,000 Cr auction, RBI accepted Rs 1502 Cr at a coupon of 6.79 per cent and had to devolve nearly Rs 3,500 Cr on primary dealers.
The coupon, which was at par with the yield on the benchmark 10-year gilt, shows a lack of interest among investors. Earlier this year in May, the Government cancelled its sovereign green bond auction of Rs 6,000 crores.
Why The Lack Of Interest?
The reason behind this is that the Government expects a “green premium” in these bonds with yields a few basis points lower than the benchmark paper. Domestic investors on the other hand do not have any mandate to invest in green bonds and thus seem to be unwilling to pay a premium for ESG instruments.
Another issue is that of liquidity since these bonds are not traded much in the secondary market, unlike GSecs which have high volumes.
The other cohort of investors expected to tap into Indian green bonds were foreign institutions. Global investors such as impact funds are more amenable to lower yields for green bonds since the funds raised are meant for environmental sustainability.
Foreign Investment Muted
Last month though the investments by foreign investors in Government Securities has been muted. The reduced spreads between the US 10-yr Treasury and Indian 10-yr GSec have led to foreign money outflows of ~$1Bn from Indian bonds in November.
This is despite significant events such as the FTSE Russell’s October announcement of including India in the Emerging Markets Government Bond Index. With US rates appearing more appealing vis-à-vis India, and the US being the largest issuer of green bonds, overseas investors may be opting for green bonds from the US and other international markets over India.
It is evident that while the principles of a green bond market have been laid out, the inherent demand is lacking and we need interventions to kickstart investor interest.
What Can The Centre Do?
Policymakers can explore various options such as mandating certain levels of investments into green bonds by various institutions or offering incentives such as income tax benefits akin to infrastructure bonds given in 2010 under Section 80CCF.
The Government could also look at differentiating the tenure of green bonds, going for longer periods that appeal to insurance companies instead of 5-10 year bonds that cater primarily to banks.
For the global investor, we need to improve the visibility of green bonds and transparency around the deployment of funds, but we will remain constrained by global market forces.
As mentioned earlier, the concept of green bonds is still in its early stages in India. The next set of sovereign green bond tranches of Rs 5,000 Cr each in December, January, and February will test the Government’s ability to sustain this initiative.
(The author is the Founder of Bondbazaar)
Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP Network Pvt. Ltd.
