What are green bonds and how can they help?

Summary

The video explores India's recent issuance of sovereign green bonds, a financial instrument designed to fund environmentally friendly projects like renewable energy and carbon reduction initiatives. Experts explain how green bonds differ from regular government bonds, attracting investors focused on sustainability and often offering lower interest rates due to high demand. The discussion covers the government’s green bonds framework, eligibility criteria, accountability measures, and international precedents. Challenges such as market liquidity and investor engagement are highlighted, along with recommendations to enhance India’s green bond ecosystem. Overall, the issuance signals India’s commitment to achieving Net Zero by 2070 and accelerating its green transition.

Takeaways

• 🌱 Green bonds are like regular bonds, but funds raised are exclusively used for environmentally friendly projects such as renewable energy and reducing fossil fuel reliance.
• 💰 Green bonds can be issued by governments, companies, banks, or financial institutions, with a specific purpose for the proceeds.
• 📉 Green bonds often attract investors with green mandates, potentially allowing issuers to borrow at a lower interest rate, known as 'greenium'.
• 🏛️ India’s Green Bonds Framework (Nov 2022) defines eligible projects, accountability mechanisms, and annual reporting requirements, supervised by the Green Finance Working Committee.
• 🌍 Global best practices for green bonds are guided by ICMA's Green Bond Principles, which India follows voluntarily.
• 💼 Green bonds are open to institutional investors, banks, insurance companies, mutual funds, foreign investors, and even governments, though domestic green funds are limited.
• 🌐 Historically, green bonds began with the European Investment Bank in 2007, with India joining the trend in 2015 via YES Bank’s offshore issuance.
• 🇮🇳 India’s government green bond issuance includes two tranches of ₹8,000 crore each, with 5-year and 10-year tenors, aiming to signal India’s commitment to a greener economy.
• 🔍 Independent agencies rate India’s green bond framework with dark, medium, or light green ratings to ensure transparency and prevent greenwashing.
• 📈 Recommendations for improvement include increasing bond market liquidity, strengthening global compliance, making the Public Debt Management Cell statutory, and raising the proportion of green bond borrowing.

Q & A

What are green bonds and how do they differ from regular bonds?

Green bonds are similar to regular bonds but the funds raised are specifically allocated for environmentally friendly projects such as renewable energy, clean transportation, and reducing reliance on fossil fuels. Unlike regular sovereign or corporate bonds, green bonds attract investors with an environmental mandate and may offer a lower interest rate due to their positive environmental impact, known as 'greenium'.

Who can issue green bonds in India?

Green bonds in India can be issued by the government, state governments (with permission), companies, banks, or other financial institutions.

What are the main objectives of India's Green Bond Framework?

The Green Bond Framework aims to define eligible green projects, ensure accountability in fund allocation, provide performance metrics, prevent greenwashing, and align with globally accepted principles, such as those by the International Capital Market Association (ICMA).

What mechanisms are in place to ensure that green bond proceeds are used appropriately?

A Green Finance Working Committee, chaired by the Chief Economic Advisor, evaluates and approves eligible projects. Issuers must provide annual reports detailing fund allocation and project performance. Independent agencies also review the framework to ensure alignment with global principles and prevent greenwashing.

Who can invest in green bonds and what role do foreign investors play?

Investors include institutional investors, mutual funds, banks, insurance companies, foreign portfolio investors, and governments. Foreign investors play a significant role because India lacks dedicated domestic green funds. Regulations have been relaxed to encourage foreign participation.

Why has India been relatively late in issuing sovereign green bonds?

India waited to observe the global success of green bonds before issuing its own. With ambitious climate targets such as Net Zero by 2070 and commitments made at COP26 and COP27, India now sees sovereign green bonds as a means to access global finance and signal commitment to a green transition.

What are the key challenges in India's bond market that affect green bond issuance?

India’s bond market is shallow with limited liquidity; about 75% of trading occurs in only the top 5–6 bonds. Additionally, there is a lack of domestic green-specific funds and investor engagement, which can limit participation and secondary market activity for green bonds.

What steps can improve investor participation in India’s green bonds?

Steps include increasing bond market liquidity, strengthening compliance with global green taxonomy, empowering the Public Debt Management Cell (PDMC) to manage investor relations and reporting, engaging in proactive investor communication, and gradually increasing the proportion of green bonds in the borrowing program.

What are the specifics of India’s maiden sovereign green bond issuance?

India plans to raise ₹16,000 crore through two tranches of ₹8,000 crore each. Each tranche will offer two tenors: a five-year and a ten-year bond. The issuance has been reviewed by an independent agency to ensure credibility and alignment with global green bond principles.

How are green bonds rated and categorized in India?

India’s green bonds are rated based on alignment with global principles using a shading methodology: dark green, medium green, and light green. Dark green indicates full alignment with green standards, medium and light green indicate areas needing clearer definitions or performance metrics to prevent greenwashing.

What is the significance of greenium in the context of green bonds?

Greenium refers to the lower interest rate that issuers can offer on green bonds compared to regular bonds. This occurs because investors with an environmental mandate are willing to accept slightly lower returns in exchange for contributing to environmentally friendly projects.

Why is international investor interest important for India’s green bonds?

International investors, such as pension funds with green mandates, provide large-scale, long-term funding for projects. Their participation signals global confidence in India’s commitment to a green transition and can help attract additional foreign and domestic investment.