India issues sovereign green bonds

India’s first sovereign ‘green bonds,’ had a well-received $1 billion issue. The issue has been promoted by authorities to the country’s largest domestic asset managers, including state-run insurers and pension funds, as well as foreign investors, said a report by Money Control.

The bonds will be allowed to count toward insurers’ required infrastructure investments by the insurance industry regulator. Banks can use it to meet mandatory government holdings, and foreign buyers have no restrictions. This is the first of the two auctions, that the Reserve Bank of India (RBI) will conduct during the current financial year.

According to a report by The Print, the issuance of green bonds will foster India’s commitment towards its Nationally Determined Contributions (NDC) targets and build credibility in the global green finance ecosystem. Transparent disclosure norms, reporting frameworks and specific screening criteria of green projects will attract sustained investor interest in India’s maiden sovereign green bond market.

A Financial Times report said that the government sold Rs80bn ($1bn) worth of five- and 10-year debt, achieving a “greenium”, or a lower borrowing cost than it would for a conventional bond of similar maturity. The 10-year bond was priced at a coupon of 7.29%, which was 0.06% points lower than for comparable sovereign debt. India has said it plans to use the proceeds raised from the bonds for projects including clean transport, climate change adaptation, water and waste management, pollution prevention and control, and biodiversity.

The Indian government has said the bonds’ proceeds will be used for green projects that encourage energy efficiency, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation and improve natural ecosystems and biodiversity, especially in accordance with the principles of sustainable development goals. The framework listed investments in solar, wind, biomass, and hydro energy projects, and urban mass transportation projects such as metro rail, green buildings, pollution prevention and control projects. The government excluded projects such as fossil fuels, nuclear power generation, and direct waste incineration. The eligible expenditure is limited to government spending that occurred not more than 12 months prior to issuance. The proceeds should be allocated to projects within 24 months of issuing the bonds. If an eligible green project is postponed or cancelled, it will be replaced by another eligible green project.

The Print report adds that in November 2022, the government issued a document outlining the framework for issuance of sovereign green bonds. The framework draws from the International Capital Market Association’s (ICMA) Green Bond Principles. In the absence of any binding legal framework, the world follows the ICMA principles as a guidepost to benchmark their green bond frameworks. The principles provide voluntary best practice guidance on the use of proceeds, process for project evaluation and selection, management of proceeds and reporting. The principles provide a broad list of project categories, which could be supported through the issuance of green bonds. Drawing on the principles, the government’s sovereign green bond framework document provides a list of eligible categories of projects. These include renewable energy projects, projects that promote energy efficiency, projects towards pollution control and other similar projects. The government intends to allocate funds within 24 months following issuance. The devolution of funds will be in tranches subject to achievement of targets specified in the project document.

The World Bank states that a green bond is a debt security that is issued to raise capital to support climate-related or environmental projects, according to the World Bank. Sovereign green bonds are issued by governments to raise resources for such projects.

As the climatebonds.net website states, green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds are earmarked(link is external) for green projects but are backed by the issuer’s entire balance sheet. There have also been green “use of proceeds” revenue bonds(link is external), green project bonds and green securitized bonds. The green bond market has seen exponential growth. It reached its most substantial milestone yet, with US$ 1 trillion in cumulative issuance since market inception in 2007. The milestone was passed in early December 2020. The very first green bond was issued in 2007 with the AAA-rated issuance from multilateral institutions like the European Investment Bank (EIB) and World Bank. The market starting to kick off in 2014 and since then each year has closed at record all-time highs.