“We need bold action on climate change, our generation may not be able to solve all the problems related to climate change, but we can do our part to leave a better planet for the next generation”, said Kristalina Georgieva, World Bank Group and Interim Chief Executive Officer. Climate change has caused an unprecedented risk to the growth of societies and economies. According to a recent report by Organisation for Economic Cooperation and Development (OECD), it has been estimated that around $6-7 trillion of annual investment is globally required to achieve the objective of moving the world economy towards a ‘greener economy’. To get the entire globe out of this trap, we need to make substantial investments that fund projects focussing on creating low carbon economies, clean energy, water transportation, etc. Only with such effective measures shall we be able to build a climate-resilient economy.
Many countries around the world have been pursuing a shift towards a more sustainable environment. Recently, the European Union launched the Next Generation EU (NGEU) fund to tackle the coronavirus pandemic. The deal puts the issue of climate change at the forefront. According to the deal document, a total of 30% of the expenditure of the €1.82 trillion will be used to reach the climate targets in conformity to the objectives of the Paris agreements. It also has a provision that rules that the European Commission should publish a report on climate expenditure annually. In order to ensure that such legislations bear fruitful results, it is important to provide investors with alternative options of investments, with higher returns and which also give them a feeling of having satisfied their responsibility towards the environment. This is where ‘Green Bonds’ come into the picture.
For the current status and impetus given to green finance globally, we can not only give credit to institutions that have introduced green bonds but also to the dynamic shift witnessed in the corporate bond market wherein we have more socially responsible investors who want to invest their money in the funding of those projects that would lead to a positive impact on the society.
Despite knowing the unmeasured potential of green finance all over the world, the total number of green bonds issued was only around 3% as a percentage of the total corporate bonds issued. This reveals the percentage of untapped potential of the green bond market which should be effectively realised to create a sustainable environment. So, how are these bonds currently being exploited in India?
The Indian Green Bond Market and the Road Ahead.
At a time when governments across the world are emphasising on creating low carbon economies, India is not lagging behind in showing its efforts in the same direction. Indian financial institutions such as the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI) are effectively trying to promote green bonds in the country. India is aiming to build 175 gigawatts of renewable energy capacity by 2022. Thus, the financing needs of the renewable energy sector can effectively be addressed by the issuance of green bonds in our country. In the last few years Indian investors, banking institutions, and the government have played a crucial role in developing sustainable finance. They have recognised it as a fundamental tool towards financing the nation’s renewable energy targets through developing strategies for sustainable economic growth and effective policy framework for judicious utilisation of all-natural resources.
Green bonds in India were introduced in 2015 when Yes Bank issued the first series of green bonds in the country for financing projects of ₹10 billion followed by ₹6 billion issuances of green bonds by CLP India. In order to regulate these issuances, SEBI issued the green bond guidelines on lines of the green bond principles issued by the Institute of Cost and Management Accountants (ICMA). By 2018, the Indian green bond market had risen to ₹500 billion. This clearly indicates that India has an enormous capacity for the development of sustainable finance which just needs to be unlocked with appropriate policies and measures. According to Climate Transparency’s Brown to Green report, wherein a study was conducted among the G20 countries measuring the Green Bond Issuance as a share of the country’s overall debt, India was ranked 5th, hence, Indian financial institutions and investors should realise that the green bond market has a long way to go.
Despite the enormous potential, the market is yet to overcome several barriers such as greenwashing, false claims of environmental compliance, etc. Additionally, there exist mismatches between long-term green investment and short-term interests of the investors which tend to make the market less efficient. Exorbitant currency hedging costs because of the high volatility of the Indian rupee, poor sovereign rating, and low tenure of the green bonds pose a hurdle in the path of creating a highly advanced green bond market. Moreover, we need to realise that till date the green bonds that have been issued in India have only been offered by highly established finance companies, whereas internationally, other organisations such as local governments, climate change organisations, and other corporate firms are all coming together to address this issue by diversifying the green bond market in their countries.
On analysing the above situation of green finance in the country, we can clearly conclude that India’s full potential still needs to be explored because currently there exists a shortage of supply as well as the demand for green bonds in the market because of various constraints. In order to increase the efficiency of this particular market, the government and the authorities need to formulate relevant policies and implement them. For starters, the short-term interests of investors as well as issuers, need to be removed by educating them that the advancement of the market in the country not only will fund the necessary environmental projects but also would allow issuers to generate a positive public reputation. Since the main reason for the lack of demand of green bonds in our country is the investors’ perception that they are not competitive enough to give them high financial returns, the governmental agencies need to step up by guaranteeing a fixed rate of return which is marginally higher than other investments so that large institutional investors and retail investors would heavily invest under this domain. Other measures such as reducing foreign exchange hedging costs will attract investors from overseas to invest in clean energy projects of India. RBI, SEBI, Indian Renewable Energy Development Agency Ltd. (IREDA), and the Ministry of Finance can play an important role in the nascent stage development of Green Finance in the country by creating more rupee denominated bonds such as the IFC-Yes Bank Green Masala Bond of 2015. Launching credited and standardised Indian green bonds that would reduce the stigma of the attached risk with green bonds can completely flip the situation upside-down.
Moreover, in order to attract domestic demand, the government should provide tax incentives to individuals for investment in such bonds. The development of sustainable stock exchanges just like the Shanghai Stock Exchange did is essential for continued growth. It has a special index to monitor the green finance situation in the country. Efforts of the government and other institutions have borne positive results. According to the Indian Economic Survey 2019-20, India has become the second-largest market for green bonds after China with $10.3 billion transactions.
Government support and a dedicated policy at hand are necessarily required to scale up the level of green bonds market in the country. An enhanced policy framework is required in action to upgrade the current situation of the green finance market in the country. This can also be done by educating investors, and removing information asymmetry between issuers and investors. An increase in investor confidence could give a new shape to the outlook of sustainable finance in our country. Only enhanced collective participation of issuers, corporate firms, financial institutions, policymakers, and regulators will give the fundamental push to the boundary of the green bond market, and would further give rise to other such opportunities in the country.
In my opinion, green bonds can be seen as the interlinking bridge connecting sustainable finance with funding quintessential environmental projects. Growth in the green bonds in India would set a precedent for other theme-based bonds such as social bonds, water bonds, and sustainability bonds that raise finance for specific developmental purposes.
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