India to bring its debutante sovereign green bond

– Vinod Kothari | vinod@vinodkothari.com

This version: 31st January, 2023

Following the Sovereign Green Bond framework issued by the Govt of India, and in accordance with the calendar of events issued by RBI, the first tranche of the sovereign green bonds has been successfully issued by the Govt of India. Remarkably, the bonds achieved a greenium of 6 basis points against the expected 2-3 basis points, with the issue selling at a 5-6 basis points lower yield than the sovereign yield of similar tenure. The issuance was more than four times oversubscribed. The five-year bond was priced at 7.10% and 10-year bond at 7.29%, as per the auction results released by RBI. Indian government bonds with the same maturity period were trading at a yield of 7.16% and 7.35%, respectively, during the relevant period.

After the launch of the Sovereign Green Bond framework in November 2022, India has made its fast move for debuting with a Rs 16,000 crore green bond issuance, in two tranches,  in January and February 2023, according to an RBI announcement. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy. The details of such projects are not immediately available; however, going by settled Green Bond Principles , which has also been adopted by India’s own sovereign framework, these projects will be identified and ascertainable disclosed by the issuer in the offer documents^[1].

The GoI green bonds will qualify as SLR securities. They will also be available for investment by non-residents on automatic route. There are two maturities – 5 years, and 10 years, each with a value of Rs 8000 crores.

Green bonds are a part of a larger category of sustainability finance instruments, including social, sustainability, transition or other various thematic bond issuances. Green bonds constitute the largest components of the so-called GSS+ bonds.

Green bonds are issued by financial sector entities, direct users as also by sovereigns. The issuance by sovereigns, such as the Government of India in the present case, is fair recent – Poland is said to be the first country in 2016 to have issued a green bond.

Use of green bonds by sovereigns

The sovereigns around the world have been actively issuing thematic bonds. While green bonds constitute the majority proportion of sovereign bond issuances (refer figure 1), others such as social or sustainability bonds are also issued. The sovereign green bonds are generally issued with the objective of addressing environmental issues and aligning own activities towards commitment to the UN SDGs, with an intention of making a positive contribution towards climate change.

For instance^[2], the Ministry of Finance of Chile issued sovereign bonds with the main objective of strengthening efforts related to climate change mitigation and environmental protection, as well as promoting growth with equity, through policies aimed at the origin of inequality. The Columbian sovereign bonds were also aimed at channelizing resources to green initiatives aligned with Colombia’s environmental goals to promote sustainable economic growth, encourage participation of other Colombian issuers in the green bond market, and diversify the investor base in local capital markets, attracting even more socially and environmentally responsible investors to the country. The green bonds issuance by Fiji also aimed at raising climate capital not only to achieve its national emissions-reduction target, but also to build resilience to increasingly threatening climate conditions. China’s green bonds issuance were directed towards developing renewable energy, promoting a low-carbon economy in the country. Countries like Indonesia and Hungary have also issued these sovereign green bonds with the objective of using the proceeds of issuance towards fighting climate change.

India, the second largest emerging market green bond issuer:

Based on 2021 data, an IFC Report ranks India as the second largest issuer of GSS bonds, out of the emerging market and developing economies (refer figure 2). However, China alone takes 63% of the global volume, and is nearly 10 times of India in terms of issuance size, at USD 59 billion in 2021. India was at about USD 6 billion.

The cumulative issuance of such bonds in India between 2012 to 2021 was USD 17.75 billion, whereas in case of China, it was USD 221 billion^[3].

The Framework prepared by DEA in India

The Framework has a very broad definition of Green Expenditure, including the following: “public expenditure undertaken by the Government in the form of investment, subsidies, grant-in-aids, or tax foregone (or a combination of all or some of these) or select operational expenditures, R&D expenditures in public sector projects that help in reducing the carbon intensity of the economy and enable country to meet its Sustainable Development Goals (SDGs). Equity is allowed only in the sole case of metro projects under ‘Clean Transportation’ category, as all metro projects in the country access the public share of their total funding through equity investments.”

Further, the Framework permits the funding to be used for refinancing expenditure incurred over the past 12 month, or expenditure to be incurred over the next 24 months.

The identification of the projects to qualify for financing under Green Bonds will be done by the Green Finance Working Committee (GFWC) under the Ministry of Finance, consisting of representatives from relevant line ministries. The GWC shall also analyze the impact of the relevant projects.

The principles for “Green Project” classification has been laid down in the Framework itself –

• Encourages energy efficiency in resource utilization
• Reduces carbon emissions and greenhouse gases
• Promotes climate resilience and/or adaptation
• Values and improves natural ecosystems and biodiversity especially in accordance with SDG principles

In order to ensure transparency, the Framework has the following to say about reporting of the end-use of the proceeds: “Government of India commits to providing investors with transparent reporting on the allocation of proceeds of Sovereign Green Bonds as well as on the environmental impact of projects funded by the proceeds. The Allocation Report will be updated annually until full allocation of proceeds of outstanding Green Bonds and thereafter in case of any material changes, and will be brought under the supervision of GFWC”.

How will the bond issuance help India?

Will issuance of green bonds help to reduce the cost of debt for the country? There is some evidence of a negative premium on green bonds, commonly called “greenium”, but past studies have shown that that is quite small.

However, the issuance green bonds by a country is an evidence of the strong commitment the country has to sustainability goals. India has recently set very ambitious goals of reducing, Emissions Intensity of its GDP by 45 percent by 2030, from 2005 level and achieve about 50 percent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030, as per August 2022 Nationally Determined Contributions statement^[4]. The issuance of green bonds sets a dedicated resource base for use for green expenditure.

Additionally, the commonly cited motivation for sovereigns to issue green bonds include alternative investor base.

The issuance comes at a time when inflationary pressures remain strong. It remains to be seen whether international investors show interest in the maiden issuance. If the issuance only fills the SLR portfolios of banks, it may not be meeting the alternative investor base motive too.

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^[1] A very broad description of “green expenditure” is available in the Framework document. See later. 

^[2] https://thedocs.worldbank.org/en/doc/4de3839b85c57eb958dd207fad132f8e-0340012022/original/WB-GSS-Bonds-Survey-Report.pdf

^[3] https://www.ifc.org/wps/wcm/connect/f68a35be-6b49-4a86-9d65-c02e411de48b/2022.06+-+Emerging+Market+Green+Bonds+Report+2021_VF+%282%29.pdf?MOD=AJPERES&CVID=o5EzvO0

^[4] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1847812

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