In November 2019, Coldplay, a popular band released a new album ‘Everyday Life’; they also made an announcement that they will not be touring to promote their new album given the increasing concerns on environmental impact on concerts. A month later, Greta Thunberg deservedly earned the recognition of Time Person of the Year 2019 – which signed off a year where ‘Environment and Climate’ took the much-needed centre-stage especially with the increasing lack of political consensus to tackle the rapidly deteriorating environment and lack of urgent action. Green bonds enable environment protection and sustainable development while also attracting a larger pool of global investors who are keen on investing in line with environmental, social, and governance metrics.
“Green finance refers to the financial arrangements that are specific to the use for projects that are environmentally sustainable or projects that adopt the aspects of climate change. Environmentally sustainable projects include the production of energy from renewable sources like solar, wind, biogas, etc.; clean transportation that involves lower greenhouse gas emission; energy efficient projects like green building; waste management that includes recycling, efficient disposal and conversion to energy”, discloses Pavan Kumar Vijay, founder of Corporate Proffesional.
Back in India, in the last decade, the concept of green bonds has seen traction from issuers like EXIM Bank, NTPC, IDBI Bank, YES Bank, etc. and the bonds were acknowledged and promoted by SEBI. Since 2014, developers raised over Rs78,200 crore via green bonds and Indian renewable energy developers have issued green bonds worth Rs26,300 crore in the first half of 2021, beating previous one-year record, according to a study by the CEEW Centre for Energy Finance (CEEW-CEF). The study, supported by Bloomberg Philanthropies, also found that Indian developers have raised more than Rs78,200 crore ($11 billion) since 2014 through green bonds issued in international markets.
Greenko and ReNew Power account for nearly 70 per cent of all issuances by value. The findings highlight the potential of green bond markets to support India’s push to achieve energy-independence by 2047, a target recently announced by the prime minister.
Nascent market
Proceeds from the Rs78,200 crore of capital raised have directly refinanced debt for over 10 GW worth of RE projects. Wind and solar power account for 42 per cent each of this refinanced portfolio and represent a combined 8.4 GW. Hydropower makes up the balance. This implies that 8.4 per cent of India’s non-hydro RE capacity, totalling 100 GW, has been debt-financed with overseas capital.
Gagan Sidhu, Director, CEEW-CEF, and co-author of the study, says, “India’s non-hydro RE portfolio crossed the 100 GW mark, but we need to ramp up capital mobilisation to get to 450 GW by 2030. Additional routes of capital such as green bonds will be essential for this transition, which requires investments of more than Rs15 lakh crore in power generation capacity alone. For perspective, the outstanding exposure of Indian institutional lenders to the power sector stood approximately at Rs13 lakh crore as of March 2020.”
The CEEW-CEF study highlighted that green bonds issued by Indian developers have generated high market interest, with average oversubscription at 360 per cent. Asian investors have shown appetite by picking up nearly 50 per cent of the bonds. However, the market remains nascent. Only eight Indian developers have accessed international bond markets as of June 2021.
“So far, international green bonds have been primarily raised by India’s established utility-scale developers. Going forward, we hope to see more developers leveraging their financial credentials to unlock much-needed capital through this route. Smaller players without gigawatt-scale capacities should also evaluate green bonds”, says Shreyas Garg, consultant, CEEW-CEF.
The study “Financing India’s Energy Transition Through International Bond Markets” recommends increased participation by developers of all sizes in international bond markets. Also, industrial units looking to set up RE plants for captive consumption can leverage their credit profiles to obtain favourable pricing. RE manufacturers can also leverage their inherently ‘green’ businesses to raise green bonds and diversify capital.
“Green bonds have lately gained prominence globally and are being seen as a lucrative opportunity by both investors and corporations looking at debt financing options. The Covid-19 pandemic has nudged policy makers across the world to rethink on priorities and adopt measures which enable a sustainable economic recovery. It is therefore estimated that sustainable bond issuance would hit a record high of $650 billion including a forecast of $350 billion in green bonds globally in 2021”, says Sameer Jain, Managing Director, Primus Partners adding that “Climate and Finance pose a Catch-22 challenge to the world”.
“The climate change impact, in addition to health and environment, will have an undeniable impact to the companies’ balance sheets. Higher compliance costs, infrastructure damages, insurance costs, and most importantly the hard-to-calculate cost of lives lost, are weighing down on companies and governments. So, climate is a definite financial risk for everyone. Paradoxically, to mitigate this climate linked financial risk, large investments and new financial instruments, both equity & debt are needed”, adds Jain suggesting that a World Bank report says that $90 trillion investments are needed by 2030 to fight climate impact. “But, it may take thrice the time to recoup the investments. This is the Catch-22! Having said that, climate change has given birth to brand new financial markets. However, even though being a global phenomenon, a one-size-fits-all approach to addressing this financial risk will not work, especially for developing nations, such as India,” adds Jain.
“While green bonds have marked benefits, they are still in their nascent stage, meaning the financial industry is not completely open to investing in the instrument and green developers are not fully aware of the opportunities offered by these bonds. As the second-largest bond market among emerging markets, India has tremendous untapped potential when it comes to green bonds and the financial industry can play a major role in enabling the segment and averting the climate crisis. Decisive steps like discounted prices, strong guidance from regulatory bodies, and incentivising green investments can go a long way towards enhancing global investor sentiment and appetite,” says Manuj Terapanthi, founder of Amaryllias Farmland.
While Indian corporates raised close to $4.96 billion through sustainable bonds, including GBs, in the first half of 2021, Ghaziabad Nagar Nigam became the first issuer of Green Municipal Bonds, thereby creating an avenue to display its niche market status in India. Although India stands second amongst emerging green bond markets after China, India’s figures are dismal in comparison to China and the US who top the table.
Bridging the gap
With a high of twelve issues (valued at $3168 million) in 2017 to a low of one issue in 2018, India’s green bond market has not seen consistency in terms of growth. “Therefore, India needs to take steps to incentivise and bridge this gap at the earliest and ensure significant rise in domestic green bond market,” adds Jain, who suggests that direct financial incentivisation is one such tool used globally. Subscribers to such GBs are provided with direct financial benefits, such as tax exemption on interest or tax deductions. Internationally, this scheme has been provided only to municipal and sovereign GBs. In the Indian context too, a blanket tax deduction of up to Rs20,000 per year under Section 80CCF of the Income Tax Act for certain notified long-term infrastructure bonds is available.
However, in all cases, the tax incentive has been provided to GB issuances only by municipal bodies, development finance Institutions or PSUs. While sustainable investing has gained traction in India, the same is restricted to non-retail investors and, therefore, tax sops for corporate GBs maybe introduced to open up the retail investor participation.
On the other hand, a ‘green bond grant scheme’ on the lines of Singapore and Hong Kong may be adopted in the Indian context to incentivise issuers. For instance, Singapore under the MAS’ Sustainable Bond Grant Scheme provides a grant of $100,000 or 100 per cent of the eligible expense per qualifying issuance. “Such a scheme ensures that issuers are constantly adopting stringent pre- and post-review mechanisms so as to comply with international GBPs and thereby is an effective tool of incentivisation,” says Vijay.
With global investors looking at sustainable investments, GBs form a lucrative option globally. In the Indian context, GBs have witnessed a mixed response with issuers primarily relying on foreign capital.
Therefore, incentivisation holds the key to revive India’s shallow corporate bond market. Incentivisation would also transform a yield-oriented investor sentiment pertinent in India to a more environmentally conscious one. While direct financial incentives like tax sops to corporate green bonds must be evaluated to spur investor demand, grants to issuers by the government would enable them to appoint international reviewers of repute which would snowball into elevating the rating of the debt-instrument, thereby increasing the number of issuances in the country. Therefore, quick policy measures must be adopted to ride the global wave.