The Growth Trajectory Of Green Bonds In India!
The current environmental scenario on the earth is evidence of how human development is attained with a serious cost. The warming planet, due to excessive pollution and greenhouse gas emissions, is facing several alarming conditions.
Along with other major countries, India has contributed significantly to this issue. Its carbon emission is set to rise by 4.6% in 20241. However, policymakers are putting efforts to solve the issue by formulating aggressive emission-reducing targets and frameworks.
Combating these crises would require significant financial assistance and regulations. One such revolutionary move was to link investments and climate financing. It was processed when the finance minister announced the introduction of Sovereign Green Bonds (SGrB) in the Union Budget 2022-232. Initially, investors may have been confused regarding what are green bonds, but the concept has gained significant success, and INR 6,128 crores has been raised as of April 2024 through green bonds in India3.
Let us understand the concept of green bonds in India and its future growth trajectory.
What Are Green Bonds In India?
These are unique debt instruments that finance only green projects. These projects should make a significant contribution to deriving the solution to the modern-day environmental crisis. It is one of the most prominent and popular techniques for Environmental, Social and Governance (ESG) Investing. In India, the issuers need to disclose the projects and their reports to the Department of Economic Affairs, Ministry of Finance.
As per RBI framework for acceptance of green deposits dated 11 April 2023 and effective 01 June 2023, the funds raised through green deposits should be utilised or invested in projects that contribute as under:
- Climate risk mitigation
- Climate adaptation and resilience
- Climate-related or environmental objectives
Categories Of Green Bonds
As per the SEBI Circular about green debt securities dated 30th May 2017, debt security will be termed as green if the funds raised are used for any of the following categories:
- Renewable and sustainable energy include wind, solar, bioenergy, and other sources of energy that use clean technology.
- Clean transportation, including mass/public transportation, etc.
- Sustainable water management, including clean and/or drinking water, water recycling, etc.
- Climate change adaptation.
- Energy efficiency, including efficient and green buildings, etc.
- Sustainable waste management, including recycling, waste to energy, efficient disposal of wastage, etc.
- Sustainable land use, including sustainable forestry and agriculture, afforestation, etc.
- Biodiversity conservation and any other category may be notified by the SEBI.
Further, as per SEBI Regulation dated 02 February 2023, green bonds are categorised into the following two sub-categories:
- Blue bonds associated with the marine sector and water management
- Yellow bonds related to solar energy
How Do Green Bonds Contribute To Sustainable Development?
Sustainable development is the process of satisfying present developmental needs without damaging future resources. The basic criterion for green bonds is its financial assistance to projects with a sustainable outlook. Some of the green project selection criteria are as follows4:
- Renewable energy
- Climate change adaption
- Sustainable water and waste management
- Pollution prevention and control
- Sustainable natural resource management and many more
When projects are selected with such potentially efficient criteria, the ethical investing objectives of investors are fulfilled. Moreover, reporting norms ensure the appropriate use of finance.
Indian investors can purchase these bonds with the help of their brokers or from the RBI Retail Direct website. Moreover, Non-Resident Indians (NRIs) can invest in them through the International Finance Service Centre (IFSC). The trajectory of green bonds in India has experienced a potential uptrend in recent years.
How Green Bonds Can Make India Greener?
The potential impact of green bonds on India's environment is significant. Here's how they contribute to a greener nation:
1. Financing Sustainable Projects
Green bonds channel funds into projects that contribute directly to India's sustainability goals, such as renewable energy, waste management, and clean water supply.
2. Research And Development
Green bonds are instrumental in driving India's energy transition by directing funds towards the research and development of innovative technologies like tidal energy. This strategic allocation gains particular significance as coal currently constitutes more than 50% of the country's energy consumption.
3. Government Support
The Government offers tax benefits to people who buy green bonds. According to Section 80 CCF of the Income Tax Act, if you invest in certain long-term bonds that help the environment, you can get a tax deduction of up to INR 20,000.
Such regulatory incentives from governmental bodies will encourage more individuals and companies to invest in a greener India.
4. Creating Awareness
Green bonds raise awareness about environmental issues among investors and the public. This ripple effect can lead to a more conscious and eco-friendly society.
The Rise of Green Bonds In India
Even before the introduction of SGrB in 2023 in the Union Budget, Indians had the option to invest in green bonds issued by entities like Yes Bank, Exim Bank of India, IDBI Bank, and more. From 2015 to 2022, green bonds of approximately INR 4539 crores were issued5. After the introduction of the framework for SGrB, the first lot of these securities were issued in January and February 2023. The issue combined amounted to INR 16 crores6.
As of April 2024, INR 6,128 crores raised by varied green bonds is depicted in the chart below:
The future trajectory of these bonds in India has the potential to cater to major needs for green projects in India. The growth of green bonds has made a significant impact on the overall objective of climate financing and Sustainable Development Goals (SDGs).
Example Of A Green Bond In The Indian Market
The introduction of India's SGrB marks the initiation of the nation's approach to funding its efforts towards achieving decarbonisation goals.
Let us take an example of a green bond invested in a solar farm. To ensure structure and security, the solar farm is moved to a distinct entity known as a special purpose entity (SPE) or special purpose vehicle (SPV). Think of it as placing the solar farm inside a designated container that holds only this asset – nothing else.
When it is time to reimburse the individuals who invested in these bonds, the funds come directly from the earnings generated by the solar farm. Thus, the success of these bonds hinges on the solar farm's financial performance.
Who Can Invest In Green Bonds?
Earlier, only Indian residents were allowed to invest in green bonds. However, the Reserve Bank of India (RBI), through a circular (RBI/2023-24/81), has allowed non-resident Indians (NRIs) to invest in the government’s SGrBs issued for 2023-24.
The government plans to borrow INR 20,000 cr through green bonds in the current financial year, opening new avenues for retail investors, both domestic and international, seeking sustainable alternative investment options.
Impact Of Green Bonds On India’s Economy
India has ambitious targets of reducing its carbon emissions to net zero by 2070, and such targets demand significant levels of finance. The public and private sectors have to work collaboratively in a similar direction. The growing popularity of green bonds in India has the potential to impact some specific sectors of the Indian economy.
- The renewable energy sector companies may find the ease of procuring funding from a larger public through these bonds. It would ultimately help in reducing the burden of fossil energy.
- Government initiatives can be catalysed when the private sector is encouraged to take up green projects with the help of green bonds. It will potentially reduce the need for government subsidies or expenditures and may help in balancing the borrowing.
- Green projects have the potential to create a significant amount of jobs and promote innovation in the sector. Working in sync with nature would require rural projects and staff. Therefore, financing through green bonds has the potential to reduce income inequality.
All these impacts on specific aspects can holistically lead to the attainment of sustainable development in the country.
However, merely understanding what are green bonds or their impact may not suffice for the future of this green financing instrument. Investors, issuers and policymakers need to spot niche challenges and work towards the same.
Challenges And Potential Solutions In Expanding Green Bonds In India
The green bonds issued by private and government organisations may encounter some structural and market challenges. Investors can potentially benefit from green bonds in the long term due to their futuristic objectives. However, green bonds are a modern-day instrument and establishing its market in the country may require awareness among the retail investors.
Moreover, the policymakers need to incentivise new startups or existing companies to take up green projects. It would formulate a sustainability-oriented business culture in the country, which can ultimately help in spreading the required awareness.
Furthermore, there is a lack of a bridge between investors and issuers. If transparency regarding the project financials, their fund allocation, issuer’s details, and more are maintained, investors may be encouraged to participate.
Global Trends And Lessons For India
The global attraction towards green bonds is evident in its growth. The market is rapidly exploring the growing inclination of inventors. There was anticipation for a significant drop in demand after the pandemic. However, opposite to this, the demand was picked up in 2021. After a minor weakness in 2022, the bonds are again ready to march towards $1.05 trillion in 20247. The trend is visible in the data by S&P Global, indicating the dominance of green bonds in overall green financing.
Along with the global trend, the prospects for green bonds in India are heading strong.
Future Prospects Of Green Bonds In India
Overall, green financing in India is gaining momentum. The government is planning to issue 4 lots of green bonds, cumulatively worth INR 20,000 crores, in the second half of FY 20258. Moreover, the recent regulation of allowing foreign investors to invest in green bonds may attract significant traffic from investors in the market. Analysing the challenges and potential solutions may help strengthen the future trajectory of these bonds in India.
Can Green Deposits Replace Traditional Fixed Deposits And Bonds?
Currently, green bonds, which fall under the category of niche investment options, are being invested by advocates of the environment and climate change. To become mainstream, they must offer higher interest rates than the traditional fixed deposits. Additional green tax benefits should attract mass investors to invest in green bonds.
Conclusion
Green bonds catalyse positive change in the journey towards a more environmentally conscious India. India's considerable population and corresponding impact on the global climate highlights the urgency of adopting sustainable practices. As the nation aspires towards ambitious renewable energy objectives, the innovative approach of green bonds offers a way for securing the requisite financial backing.
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Frequently Asked Questions On Green Bonds
1. How can I invest in green bonds?
Investing in green bonds can be facilitated with the help of authorised brokers or brokerage firms. Moreover, investors can visit the Retail Direct site of RBI. If an investor is NRI, investment can be done through IFSC.
2. What makes green bonds different from traditional bonds?
The feature of ethical investments stands out in favour of green bonds. Due to its popularity, it is attracting investors all over the world. Moreover, its purpose-oriented functioning helps investors understand the legitimate use of their funds for environmental causes.
3. Which sector in India benefits the most from green bonds?
The budding renewable energy sector may benefit the most from the financial backup of green bonds. Moreover, big companies with efficient resources are also encouraged to take up green projects.
References
- The Indian Express, Accessed from: https://indianexpress.com/article/india/indias-fossil-based-co2-emissions-to-spike-4-6-per-cent-in-2024-study-9666820/
- Ministry of Finance, Accessed from: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1874788
- SEBI, Accessed from: https://www.sebi.gov.in/statistics/greenbonds.html
- Framework for Sovereign Green Bond: Government of India, Accessed from: https://dea.gov.in/sites/default/files/Framework%20for%20Sovereign%20Green%20Bonds.pdf#page=9
- The Journal of Indian Institute of Banking and Finance, Accessed from: https://www.iibf.org.in/documents/BankQuest/6.%20.pdf#page=11
- RBI, Accessed from: https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=55004
- World Economic Forum, Accessed from: https://www.weforum.org/stories/2024/11/what-are-green-bonds-climate-change/
- Ministry of Finance, Accessed from: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2059143
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