Green Finance and Grey Areas: Rethinking India’s Sovereign Green Bond Strategy

The authors are Samyak Deshpande and Simone Vaidya, second-year students at Maharashtra National Law University, Mumbai.

I. Introduction

Green financing has emerged as a buzzword amid the 21st-century crisis of global warming and climate change. The term refers to financial flows and investments in sustainable projects, products and policies, with lending decisions being taken on the basis of environmental screening and risk assessment. Sovereign Green Bonds (‘SGrBs’) have emerged as unique financial tools to address climate change and finance green development projects. Green bond issuances were pioneered by the World Bank and the European Investment Bank in 2008, laying the groundwork for the monetary policies of several nations. Countries such as China, France and Germany have emerged as leaders in the green bond market, with national governments playing critical roles by issuing bonds to generate debt. India’s foray into the world of green bonds was in 2017, with the SEBI notifying guidelines on green bonds. 

This market was bolstered further in 2023, with the Union Government developing a Framework for Sovereign Green Bonds, marking India’s entry into the sovereign green bond scheme. The SGrB Framework reflects a deliberate endeavour to align the International Capital Markets Association’s Green Bond Principles (‘ICMA Principles’), which are considered to be the global benchmark for issuances of green bonds. The Framework establishes a Green Finance Working Committee (‘GFWC’) to support the Ministry of Finance in selecting and evaluating projects. It also asserts the importance of transparency and accountability, and the Public Debt Management Cell (‘PDMC’) is tasked with the responsibility of managing the proceeds of the SGrB issuance. The final pillar of the ICMA Principles pertains to reporting, which is crucial for maintaining investor confidence in the bonds, as well as integrity of the green bond market. This is especially pertinent in the context of “greeniums” or “green premiums”, which are benefits received by green bond issuers, on account of investors being willing to accept lower yields due to the stamp of sustainability on the bond. The SGrB Framework mandates annual reporting on the allocation of proceeds, as well as the environmental outcomes of the projects funded. 

The Indian SGrB was issued in two tranches, with the first issue generating immense investor enthusiasm. The second issue, however, generated a lackadaisical response, ultimately compelling the Reserve Bank of India to cancel the auction as a whole. This blog seeks to comprehensively analyse the operational challenges that have surfaced as a result of lackluster demand, absence of standardisation and complications arising from overlapping institutional responsibilities. The authors conclude by charting a way forward, offering policy recommendations to bolster India’s green bond market.

II.   Critiquing the Framework

A. Persistence of the Problems with the SGrBs Auctions: Lackluster Demand?

The first auction of these sovereign green bonds met with multiple setbacks. The initial tranche in January was oversubscribed, with demand from market participants being more than four times the amount of bonds available. While the ₹80 billion tranche yielded a slightly higher premium than the second, which raised almost the same amount and completed the ₹160 billion sale, the pattern of oversubscription poses a problem. Experts have opined that a premium is expected from green bonds, but its value remained uncertain. 

Consequently, the RBI and Government did not accept any bids in April 2024 at the first SGrB auction of the financial year. The oversubscription at the past auctions shadowed the decisions of the investors, who seemed to be unwilling to pay the greenium. The dominant reason for the lack of demand among investors is the remoteness of sustainability concerns in business considerations. 

This does not seem to be the case in other countries, such as Sweden, where corporations are strictly mandated to direct their attention to sustainability. This ensures corporate investments in green bonds, thus funding and facilitating climate projects. Greenium reluctance does not seem to be an endemic problem in such regions, while the aversion towards paying a greenium in India can be attributed to the lack of awareness of green finance.

A crucial misstep in this endeavour can be traced back to the delayed formulation of the Framework. India ratified the Paris Agreement on October 2, 2016, which called for the mobilization of resources for climate action, including through financial instruments. The announcement of the SGrBs took 7 years. Further, the guidelines for green bonds issued by corporate entities were notified as early as 2017, whereas the Framework was approved in late 2022. In contrast, countries like Poland, France and the Netherlands set the tone for their domestic markets by rolling out sovereign green bonds in 2016, 2017 and 2019, respectively. If the government had acted swiftly to introduce a robust and credible sovereign framework at that time, there could have been a benchmark to reinforce investor confidence not just in sovereign issuances but in the green bond market as a whole. 

This is especially pertinent in the Indian context, where public-private partnerships (PPPs) are not just beneficial, but essential for financing large-scale infrastructure and sustainability initiatives. Even while India is moving in the right path thanks to these initiatives, the demand worries remain. In 2023, India issued US$21 billion worth of green bonds, which accounts for just 2.2% of worldwide issuances despite its sizeable emissions.

B. Absence of Rubric for Selection and Evaluation of Projects

The Framework suffers from several inherent deficiencies, including the absence of a clear rubric for selecting and evaluating projects. It stipulates that the proceeds raised from the SGrB shall be used to “finance and/or refinance expenditure for eligible green projects”. As established in the preceding section, the Framework provides for the creation of the GWFC for this task, with the responsibility for initial evaluation lying with the concerned Ministry or Department. This concern has been flagged in the solicited Second Party Opinion issued by the consultation firm, CICERO, but its recommendations in this regard do not appear to have been incorporated intothe Framework. While the stages of review have been broken down systematically, there is a conspicuous silence regarding any standard or threshold against which such projects may be evaluated.

Firstly, there is a straightforward challenge in measuring the comparative environmental impact of various projects. While the Framework-prescribed “principles of selection of green projects” delineate the various objectives a project is expected to align itself with, there is no standard metric to select one project over another. As a result, projects may be granted or denied funding without a clear assessment of their environmental impact, which is counterintuitive to the original purpose of these bonds. Secondly, the large scope for discretion could lead to arbitrariness and inconsistency in selecting projects. In such instances, there could be issues relating to bias, favouritism and potential corruption in decisional practices. 

As a result of these lacunae, there is the third concern of erosion of stakeholder trust in the Framework which is two-fold in nature: concerning the entities implementing or managing the projects, and the investors purchasing the green bonds. Firstly, for the project-linked entities, there is difficulty in ensuring compliance and alignment with the project evaluation process, since there is no set guideline for the same. Secondly, this has a negative impact on investor confidence, as has been established in the preceding sections. This severely affects the marketability of the SGrBs, since environmentally-conscious investors might be sceptical about the purpose and effectiveness of the Framework itself.

C. Complications in Overlapping Roles of Multiple State Bodies

The multiplicity of regulatory bodies is an issue plaguing multiple sectors of the Indian economy, and the SGrB Framework is no exception. Currently, the Framework lays down the respective roles of six authorities, namely the Ministry of Finance, Ministry of Environment, Forests and Climate Change, PDMC, RBI and NITI Aayog. 

However, the division of powers and responsibilities does not play out seamlessly in actual practice. One example of mismanagement due to the involvement of multiple Ministries is the Sardar Sarovar Dam Project. This project required a concerted and collaborative approach by the Ministry of Water Resources, Ministry of Environment and Forests, and state governments. Among many controversies, a factor contributing to the delay of the completion of the project is the denial of clearance by the Ministry of Environment and Forests. Therefore, a chief concern in this regard is the difficulty in coordination of tasks across several Ministries and Departments, resulting in inordinate delays and potential red-tapism.

Another pitfall is the perpetual friction between the Centre and the RBI with respect to the management of public debt. The PDMC was originally conceptualized as an ‘interim’ arrangement before the establishment of a full-fledged Public Debt Management Agency, in order to separate powers and functions from the RBI thereby vesting the power of public debt management in the Government. However, this scheme is yet to be implemented, and the PDMC has undertaken this function as a “middle office” between the RBI and Central Government. India is one of the only countries where the Central Bank is the issuer, manager and regulator of government debt; in most other countries, there is a unified regulator of the financial market, which includes the government bond market as well. This could plausibly create complications in the effective and efficient implementation of the Framework due to a potential disagreement or tussle for power among the various entities and authorities.

III. Conclusion 

India today stands on the brink of an extraordinary opportunity to lead the way in sustainable growth through SGrBs. These bonds, issued by the government to fund environmentally friendly projects, i.e. green finance, have immense potential for a country like ours that’s grappling with the realities of climate change and the need for renewable energy. Yet, the adoption of green bonds has been tepid, hindered by gaps in policy, awareness, and market readiness. To transform this potential into performance, India must focus on well-considered reforms that address structural challenges while aligning with the evolving needs of investors.

Firstly, ensuring investor confidence should follow a two-fold strategy of raising awareness and maintaining transparency. The auditing requirements outlined in the Framework must be followed in letter and spirit. This will not only assure investors, but also elevate India’s standing in the global green finance market. Alongside this, creating incentives such as tax benefits, reduced interest rates, or partial guarantees on returns can make green bonds more appealing, particularly in a market that often prioritizes short-term financial gains over long-term sustainability.

Green finance must also become more accessible to all stratas of society, and particularly institutional investors including pension funds and mutual funds, as they have a significant roleto play. The government should consider policies that nudge these players to allocate a portion of their portfolios to green finance. 

It is thus pertinent to note that Sovereign Green Bonds are not just financial instruments; they represent a commitment to a more resilient and sustainable future. To realize their potential, India must undertake reforms that are economically pragmatic but accountable too. The road ahead demands a careful balancing act of incentivizing investment and truly building trust, but the rewards, i.e, a fulfilment of our vision for a greener, more sustainable India, are well worth the effort.