The thinking behind issuing a green bond is to seek out international investors. (Representative Image)
On January 25, India will issue the first tranche of its $2 billion green bond issuance commitment. Though this sovereign issuance is just around 0.2 percent of the total net issuance for the year, it will mark India’s much-awaited entry into the environmental, social and governance (ESG) debt market, which is estimated by Bloomberg to be worth $15 trillion by the year 2025. With the enactment of the Green New Deal (GND) in the US, which will govern a major part of America’s transition into a sustainable economy, along with influential green activists active in the debt market, stakes are indeed high.
India’s green bond issuance comes after the formal introduction of the Framework for Sovereign Green Bonds (FSGB), which is in line with the country’s Sustainable Development Goals (SDG). The thinking behind the green bond issuance is to seek out international investors, who give climate change mitigation a priority and help India achieve its climate change targets.
The government of India intends to use the resultant proceeds in the financing/refinancing of projects under certain identified categories, which include renewable energy and energy efficiency, clean transportation, climate change adaptation, green buildings, pollution prevention and control, sustainable management of living natural resources and land use, sustainable water & waste management, climate change adaptation, and territorial & aquatic biodiversity conservation.
This initiative is part of India’s Nationally Determined Contributions (NDCs), coverage of which is mandatory under the United Nation Framework Convention for Climate Change (UNFCCC). The Sharm el-Sheikh climate accord (COP 27), and its precedent Paris accord (COP 26) already require India to commit guarantees such as a reduction of its GDP’s emissions intensity by 45 percent (from year 2005 levels) by 2030. As a ratifying member of the relevant UN charters on climate change mitigation, India has recently submitted its strategy document listing ways in which it plans to achieve carbon neutrality by 2070.
However, achieving these yardsticks is not cheap and according to an estimate by McKinsey & Company, it will cost India $7-12 trillion by 2050. These figures are more than 2-3 times India’s current nominal GDP. Understandably, getting the requisite funding is a tall order and India will need ‘global financial resources’, and the FSGB clearly delineates such requirements.
While India has only started on this road, policymakers must look at what China is doing in this space. According to Green Bond Initiative (GBI), China has emerged as the second largest issuer of green bonds and until the end of 2021, it had issued about $200 billion and $68 billion, cumulatively, and annually, respectively. Since these estimates cover only those bonds that are issued under the guidelines of the GBI, there can roughly be the same amount of green debt issued under Chinese domestic guidelines as well.
As per preliminary estimates by this author, green debt issued in China is currently yielding a markup of roughly 50 basis points (bps) over and above an equivalent duration debt instrument. What this means is that if a 1-year Chinese Government Security is yielding 2.092 percent, then a Chinese Green Bond of similar duration would yield in the vicinity of 2.592 percent. While it is too early to assess the expected yield to maturities (YTMs) for Indian green debt instruments of different maturities, a similar ballpark can be assumed since this debt will be 100 percent sovereign guaranteed and most likely eligible under the RBI’s Liquidity Adjustment Facility (LAF).
Also, with time, as the green debt becomes well-entrenched in the system, and starts to attract more mature capital, most issuers would come from the private sector. Again, citing the GBI report, over 80 percent of green debt issuance in China is coming from financial and non-financial corporate entities, with the remaining 20 percent contributed by government or government-backed entities.
It is expected that with time, India will also witness its corporates taking the lead as green bond issuers with the government being relegated to a supplementary role. Nevertheless, India must plan its green bond strategy well and convince foreign investors of robust monitoring and reporting standards, along with well documented ‘proceed-use’ standards for investors.
The Green Finance Working Committee (GFWC), which is set up under the leadership of the Chief Economic Advisor must also initiate a sub-committee on the formulation of India-EU common ground taxonomy (on the lines of China), along with similar arrangements with other outward capital nodes such as the US and Japan. Common taxonomy will reduce complexities in identifying the right issuers and capital’s intended use, reducing chances of green-washing, and building investor confidence.
Rapid action in this direction will open India’s green debt market to ESG-sensitive investors, especially those focusing on environment-related safeguards. India must understand that with the Green Climate Fund getting a new lease of life during COP 27, there are chances that the ESG debt market (through green bonds) will expand even further and may qualify only those nations that have gained the trust of green investors and influential activists. Given the scale of capital at risk, perhaps the time is right to enact the equivalent of the Green New Deal by India as well.
Karan Mehrishi is an economist, specialising in monetary economics and fixed income. Views are personal and do not represent the stand of this publication.
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