India has pledged to be net zero by 2070 and that is a significant commitment from the country of its scale and potential. From putting a thrust on renewable energy to increasing ethanol blending to producing green hydrogen, India has embarked upon the path to achieve the feat, though the journey has just begun.
In order to achieve the net zero target, the country has to build massive green infrastructure across its length and breadth. This would require huge capital expenditure.
According to an Economic Times report, India will have to spend over USD 10 trillion to become net zero by 2070. This means that the country will have to mobilize massive funds year-on-year to achieve this target. Annually, it must raise funds amounting to USD 160 billion, the same report said. The country mobilized USD 18 billion in climate investments in 2018. India must widen the ambit of its resource pool to achieve the investment target. One of the ways to raise funds is through the issuance of Sovereign Green Bonds or SGBs and it found a mentioning in the Budget 2022 speech delivered by the Union Finance Minister.
As a part of the government’s overall market borrowings in 2022-23, sovereign Green Bonds will be issued for mobilizing resources for green infrastructure, the Budget speech said adding that the proceeds from it will be deployed in public sector projects which will help in reducing the carbon intensity of the economy.
Sovereign Green Bonds can be issued in India and overseas markets in domestic or foreign currency. While, the quantum of bonds and the markets and currencies in which they will be issued have not been spelt out by the government till now, it is perceived that SGBs worth Rs 24,000 cr will roughly be issued. We may hear something on it sooner or later.
The market for SGBs in India is quite nascent and a policy framework is yet to come on it. This is not to say that India is new to green bonds. In fact, green bonds have been issued by its corporate sector and banks.
India has been taking a lead on various international forums to not just emphasize on the need for sustainable development (while standing its ground to highlight its growing energy needs to the world) but also laying down a roadmap of how it intends to achieve its Sustainable Development Goals (SDG) before the deadline.
The country has issued SGBs worth USD 18 billion till now. Amid fears of global recession, raising significant money may not be easy, as of now, for any emerging economies including India.
As we are in the fourth month of this financial year, soon we could see some clarity on the manner in which the SGBs will be issued. We may see announcement of a policy on Sovereign Green Bonds that could cover considerations including choice of currency and markets, sovereign guarantees and credit enhancements, priority areas for the use of proceeds.
Depending upon what government thinks is the most pressing needs of the country it may take decisions of specific projects or sector selection.
There will also be guidelines on aspects including those related to disclosures, reporting, monitoring and verification.
India needs a separate green bond accounting framework for making SGBs a success and also ensure global trust if countries, companies or institutions show willingness to invest here. It cannot have the same reporting and disclosure standards like the regular bonds.
It is a complex exercise, especially amid current economic turmoil, pandemic and the ongoing Russia-Ukraine war.
But there is a reference point. Zurich-based International Capital Market Association (ICMA) has published a set of voluntary guidelines and criteria known as the Green Bond Principles (GBP). The principles of which, cover use of proceeds, project evaluation and selection, management of proceeds and reporting.
The guidelines updated as of June 2021 prescribed by ICMA give a way forward on how to utilize the proceeds of SGBs for projects in climate change mitigation and adaptation, conservation of natural resources and bio-diversity and pollution prevention and control. The GBP recommend transparency and disclosure and promote integrity in the development of the Green Bond market by clarifying the approach for issuance of a Green Bond. The GBP recommend a clear process and disclosure for issuers, which investors, banks, underwriters, arrangers, placement agents and others may use to understand the characteristics of any given Green Bond, their website says.
Sustainable development has been a hot agenda across the globe and countries have been taking steps to build green infrastructure even as they realize that the time to act to save climate is now. Globally, markets have been responding earnestly to the large requirements of green finance to reshape their economic activities in a much more sustainable way.
Green bonds are attractive fund raising options as the premium on bonds provides a yield discount of 10-20 bps.
SGB Options
The government will have to decide among the choices it has. SGBs denominated in foreign currencies in international markets have the otential to create a sizeable investment pool for the country. It will also give benefits of a lower yield. However, there are risks that come along including those related to foreign exchange risks for issuers. Domestic currency bonds in the international markets may not find enough takers in the overseas markets, though they could address risks related to foreign currency fluctuations for the issuer. The Rupee denominated bonds of this kind are called ‘masala bonds’ of which there has not been a sovereign issue so far.
The government can issue SGBs in the domestic markets but we don’t know what response it will get here. There is minimum risk of default for such bonds as there is a sovereign guarantee on it and the government has the ability money. It will be interesting to see what route government decides to take. With India as a major stakeholder because of its growing energy needs and a confident emerging economy, it will play a vital role in how the world maintains a climate balance. A strong policy and transparent disclosures will hold it in good stead and encourage investments, ndoubtedly.
