MC Exclusive| India close to launching first-ever transition bonds; consultation paper to outline framework expected soon

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India is gearing up to launch its first-ever transition bonds, aimed at driving decarbonisation in hard-to-abate sectors like cement and steel. In a major step forward, the International Financial Services Centres Authority (IFSCA) is set to release a consultation paper within the next two weeks, laying the foundation for a framework that will guide the issuance of these crucial bonds, a senior official told Moneycontrol.

"An expert committee report has been submitted to the IFSC and we are working on the framework for transition bonds. A consultation paper for listing these bonds will be out in two weeks," said Arun Prasad, General Manager at IFSC. The expert panel enlists sustainability and treasury heads of sector heavyweights such as Tata Steel, JSW Group and UltraTech Cement.  The committee, which was set up last year, was tasked to assess the trends in the segment and identify the best practices for transition finance in India by 2047.

What is transition finance?

Transition finance refers to funding aimed at helping industries and companies reduce their carbon emissions and shift towards more sustainable practices. Unlike green finance, transition finance allocates capital to companies and activities that are not “green” but are in the process of “becoming green” or reducing emissions. At present, such bonds are popular in countries like Japan, the European Union and the UK.

"For transition finance to become mainstream as a class of directed financing, a definition and clear understanding of boundary conditions is the first step. Currently, there is a lack of global consensus on the definition and framework for transition finance. As a result, the market for transition finance is currently small and there is ambiguity on the role of Financial Institutions (FIs) in financing transition activities," according to the report submitted by the committee.

Recommendations made by the committee to increase the mobilisation of transition finance through financial instrument issuances include: taxonomy compliance for transition finance, the need for tax incentives, enhanced ESG and climate risk disclosures put out by the corporate and financial entities etc among others.

The move to enable such bonds also aligns with the central government's plans to introduce a policy for industries such as iron and steel, cement, chemicals, aluminium and oil and gas, which have a higher carbon footprint, to nudge them to lower emissions. In the Union Budget speech, Finance Minister Nirmala Sitharaman said that a roadmap for moving the ‘hard to abate’ industries from ‘energy efficiency’ targets to ‘emission targets’ will be formulated.

At present, the financing landscape in India is skewed towards sectors focused on mitigation, including renewable energy proliferation and transport, which have developed a strong business case and garnered substantial political support compared to other energy-intensive and hard-to-abate sectors, according to a research report by Observer Research Foundation (ORF).

GSS+ bonds

As of now, India is the sixth largest issuer of GSS+ (Green, social, sustainability and sustainability-linked) bonds in the Asia Pacific region, with green bonds constituting more than 62 percent of overall GSS + bonds issued in India. About 49 percent of the green bond issuances in India were for the utility sector, according to a presentation by CRISIL's Rathin Kukreja at the NabFID infra conclave held on September 12.

The expert committee report pointed out that climate financing has largely been directed toward sectors with low or near-zero carbon emissions, leaving a gap in funding for harder-to-decarbonise industries.  "The need of the hour is to cover all sectors, especially hard-to-abate sectors. This gap is currently not being met with the existing GSS+ labelled bonds," it said.