Green bonds have emerged as an important financing instrument for renewable energy and other environmentally friendly projects in India. A green bond is a fixed-income financial instrument where the proceeds are used to fund projects that have positive environmental and climate benefits.
India’s green bond market has seen rapid growth in recent years. The country’s first green bond, issued in 2015 by Yes Bank, was worth Rs 10 billion. Since then, several Indian companies, financial institutions and government agencies have tapped the green bond market to raise funds.
The year 2023 was significant for India’s green bond market. The Government of India made its debut in the sovereign green bond space, issuing the first tranche of a sovereign green bond, worth Rs 80 billion, in January 2023, followed by a second issuance of Rs 80 billion in February 2023. In 2023-24, the government has issued sovereign green bonds worth Rs 200 billion in four tranches of Rs 50 billion.
The launch of India’s sovereign green bond programme is a major milestone for the market. It demonstrates the government’s commitment to using innovative financing mechanisms to meet the country’s substantial climate investment needs and catalyse the corporate green bond market by providing a price reference for new issuers.
The government plans to use the capital raised through sovereign green bonds to finance public sector projects in renewable energy, clean transportation, energy efficiency and other green infrastructure. A significant portion of the proceeds will go towards financing solar and wind power projects. This is crucial for India’s clean energy transition, as coal currently makes up 55 per cent of the energy mix. Electric vehicles and railway electrification are other key focus areas.
Role of the private sector
While sovereign green bonds mark a new chapter, private financial institutions and corporates have already made significant contributions to the expansion of the Indian green bond market.
From 2015 to 2022, the private sector accounted for 84 per cent of total green bond issuances from India, as per World Bank data. Non-banking financial companies such as housing and infrastructure finance firms have been prominent issuers. Major corporate issuers include companies in the renewable energy, power and utilities sectors. For the private sector, refinancing is the most common use of proceeds, and its popularity has risen since 2019.
The majority of the proceeds from the green bonds issued in India have been allocated towards financing renewable energy projects. Beyond project-level funding, green bonds are also channelling capital to renewable energy manufacturers and service providers. For instance, Suzlon raised $172 million in 2020 via green bonds for wind turbine manufacturing and R&D.
There are many other examples of green bond issuances in the sector. REC Limited raised Rs 35 billion by issuing its first yen bond under its $10 billion global medium-term notes programme. This was its eleventh venture in the international bond market. ReNew Energy Global, through its wholly owned subsidiary, Diamond II Limited, raised $400 million through the issuance of senior secured green bonds in the first quarter of 2023-24. The Greenko Group has, so far, raised over $3.4 billion to fund hydro, solar and wind power projects in several Indian states with its green bond proceeds. Several other companies such as ACME Solar, Adani Green Energy Limited, Azure Power, Tata Cleantech Capital and public utilities such as NTPC and the Power Grid Corporation of India have accessed green bonds for their sustainability ventures. Several subnational entities such as municipal corporations have also tapped the green bond market in recent years.
While green bond proceeds have predominantly been allocated to renewable energy so far, issuances are also directing financing towards other environmental objectives. Sustainable water management is the second largest sector after renewable energy, with around 11 per cent of total proceeds being allocated to it. Major water infrastructure projects such as irrigation, water treatment and recycling have been funded by green bonds from issuers such as the National Bank for Agriculture and Rural Development and the National Housing Bank.
For urban transportation projects, the Pune Municipal Corporation issued India’s first municipal green bond, worth Rs 2.6 billion, in 2018. The proceeds are being used for metro rail construction in the city. Green buildings have also attracted financing through green bonds. HUDCO and L&T Finance have issued green bonds focused on funding energy-efficient affordable housing projects. The green buildings sector could see more activity as certification standards evolve in India.
Waste management, biofuels and climate adaptation initiatives have received smaller allocations so far. As the market matures, India’s green bond proceeds could diversify further to meet sustainability funding needs across sectors.
Robust policy framework
A robust policy and regulatory framework has been integral to the growth of India’s green bond market. In 2017, the Securities and Exchange Board of India (SEBI) put out specific guidelines and disclosure requirements for the issuance of green bonds. This provided clarity to issuers and investors. SEBI mandates the appointment of external reviewers to confirm the alignment of green bond frameworks with green bond principles.
The Reserve Bank of India has also introduced multiple incentives, such as priority sector lending benefits, for green bonds. Investments in green bonds allow banks to meet their mandatory priority sector targets.
In the 2022 budget, the finance minister announced several tax incentives for issuing and investing in green bonds. These fiscal benefits have boosted investor appetite. The government has also been working on developing standards and guidelines for social bonds and sustainability bonds, which will widen the understanding and adoption of sustainable debt instruments.
Constraints and impact measurement
Despite the growth, India’s green bond market needs to address some constraints to realise its full potential.
One key challenge is the limited availability of green projects that meet the eligibility criteria. Asset owners face barriers such as lack of technical capacity, high transaction costs and policy risks that restrict the pipeline of bankable green projects. Structured interventions are required to bridge the supply gap.
Post-issuance reporting and impact measurement also remain weak areas. Very few Indian issuers disclose details on the environmental impact of projects financed by green bonds. Independent verification and annual reporting have to become more rigorous to build investor confidence.
For retail investors, there is limited understanding of green bonds and their associated benefits due to lack of awareness. Developing green bond investment products suitable for small investors can improve participation, especially in the domestic market.
While costs have been moderated, issuance expenses continue to be higher than conventional bonds. Measures to reduce registration, certification and legal costs can help lower entry barriers for issuers.
The way forward
There are several possible policy directions that could help India overcome these bottlenecks and tap the full potential of green bonds. Providing investors detailed post-issuance reporting on green bond proceeds and quantitative impact metrics is vital for transparency and credibility. SEBI could make these disclosures mandatory for issuers.
Incentivising the issuance of green bonds by municipal bodies and corporations through measures such as tax rebates and credit enhancements would improve supply. The government could also establish co-financing facilities and structured funds to address the dearth of bankable projects.
For the sustainable bond market to flourish, social bonds, sustainability bonds, transition bonds and sustainable development goal-linked bonds need to gain prominence alongside green bonds. Issuances have begun across these instruments, but remain limited.
Overall, a supportive policy environment, standardisation of procedures, investor awareness programmes and collaboration between regulators and industry players can significantly broaden India’s sustainable finance markets. The sovereign green bond programme has provided a fresh impetus at an opportune time. With complementary policy efforts, India is poised to become one of the leading sustainable debt markets globally, financing its green transition across sectors. Robust green bond development, coupled with green finance frameworks, can put the country on a sustainable trajectory.
Lavkesh Balchandani
