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Sovereign Green Bonds: Way Towards Sustainable Growth

by Tavaga Invest
Sovereign Green Bonds

By: Tavaga Research

Climate Change is no longer a thing of the future, its adverse consequences can be observed across the globe in the form of wildfires, excessive heat waves, and extremely cold winters, among others. The action towards mitigating climate change and sustainable living is long pending. 

Good thing is that many countries have started taking essential measures in the right direction. India, too, has stepped on a pedestal against climate change and favoring sustainable growth. In a recent conference in Glasgow, Scotland Prime Minister Narendra Modi has announced that India will achieve net-zero carbon emissions by 2070. 

FM Nirmala Sitharaman has declared several measures in the latest Union Budget 2022-23 to indicate climate action. She announced issuing green bonds to mobilize resources for green infrastructure, battery swapping policy, additional funds of Rs 19500 crore distributed under PLI Scheme for producing high-efficiency solar modules. Moreover, to accelerate usage of renewable energy, a new bill for carbon trading will be introduced. 

Sovereign green bonds will be used to reduce carbon emissions through public projects. Let’s understand in detail what exactly Green Bonds are.

What are Green Bonds?

Green bonds are bonds issued by corporates, sovereign entities, inter-governmental organizations, and multinational corporations whose proceeds are deployed towards environmentally sustainable projects. 

They have positive environmental and climate benefits such as energy efficiency, renewable energy, clean transportation, and sustainable water projects.

In SEBI Circular of 2017 green bond is defined as a debt instrument used for projects following one of the objectives:

  • Sustainable and renewable energy including solar, wind, bioenergy, and other sources of energy that use clean technology.
  • Clean transportation, including public transportation, etc.
  • Sustainable water management comprises clean and/or drinking water, water recycling, etc.
  • Climate change.
  • Energy Efficient and green buildings, etc.
  • Sustainable waste management, including waste to energy, recycling, efficient waste disposal, etc.
  • Sustainable land use such as afforestation, sustainable forestry, agriculture, etc.
  • Conservation of Biodiversity and any other category may be notified by SEBI.

International Capital Market Association (ICMA) has recommended four core components under Green Bond Principles (GBP) to be qualified as Green Bonds:

First is that the proceeds must be utilized for green projects only, second is to highlight the process implemented for evaluation and selection of project, third is to maintain transparency in proceeds management, and lastly, facilitate reporting of proceeds post-issuance.

So, where does India stand in Green Bonds Issuance?

India’s Stance on Green Bonds

India is a country with the second-highest population after China and would require more resources to meet the needs and demands of its people. Consequently, it’s the third-largest emitter of carbon dioxide in the world after the US and China. To reach net-zero carbon emissions by 2070, it would require an investment of $10 trillion.

It provides an opportunity for banks and corporations to tap into the climate-related debt market more actively. Moreover, it is assumed that issuers would turn to offshore investors to raise funds as there is a broader and deeper pool of climate-conscious investors.

The table shows the volume of green bonds issued in the past five years. In the first eleven months of 2021, around $ 6.11bn bonds were issued, which is the highest since its inception in India. The trend has been more or less unstable, with the volume rising in specific years while falling in the others (Source: Climate Bonds Initiative).

For 2021-2030 India’s Intended Nationally Determined Contribution (INDC) under the Paris Agreement includes curtailing emission intensity of its GDP by 33% to 35% from 2005 levels. Estimates reveal that India would require more than $2.5 trillion to meet its commitment by 2030.

As far as it seems, the future outlook will change in favor of green bonds as plenty of initiatives or policies have been introduced by India and foreign governments alike. The Indian government is actively promoting sustainable growth, as portrayed in the recent budget 2022-23. Companies at large are becoming aware of their carbon footprint level and taking steps to reduce its number and impact. Further, banks will issue green bonds to stimulate India’s energy transition to provide funding to green projects. 

Issuers of Indian Green Bonds

 Source: Climate Bonds Initiative

The graph shows the types of Issuers of the Indian Green Bonds; data reveals that non-financial corporates are primarily issuing green bonds amongst all types of issuers. In the first 11 months of 2021, 94% of the bonds are issued by non-financial corporates. The number has always been higher for these entities.

Now, what can be done to provide a push to the green bonds market? One of the obvious answers would be Incentives! Companies love incentives and subsidies and take every possible action to save on their expenses. By offering a partial or full reimbursement on the cost of external reviews, credit rating, and cost related to the issuance or by providing a tax deduction on issuance, the government can set the ball rolling.

What does the global scenario look like in issuing green bonds?

Global Outlook

Due to the growing awareness in recent years regarding climate change and its life-threatening consequences on the human population, several economies have started taking multiple measures to ensure timely action. The green bond market has expanded and deepened recently, with demand from diverse investors such as local governments to corporate entities, sovereign wealth funds, and pension funds dedicated to sustainable investment and ESG integration.

Sovereign Green Bonds Issuance

Amid the pandemic, the issuance of green bonds has gained momentum, with sixteen sovereigns issuing green bonds worth USD 80bn. Most of them were already issuers of such bonds to fund sustainable projects, while Germany and Sweden joined the league in 2020.

Irrespective of its speedy growth, the size of the traditional bonds market significantly outweigh the green bonds market. In the OECD region, sovereign green bonds comprise only 0.1% of all government debt securities.

The market is expected to grow as many governments find it useful to issue green bonds to meet their commitments of the Paris Agreement and further become responsible stakeholders of the environment.

Globally, the USA, Europe, and China have emerged as countries with the largest green bonds market; the USA comprises 18% of the world’s share of the green bonds market, which accounts for $52.1bn worth of green bonds. In 2020, out of 144 issuers of GBs, the USA topped the chart. 

China’s green bonds market had shown tremendous growth since 2015 when it was formalized, from $29bn in 2016 to $120bn in 2020. In comparison, India has not shown consistent growth and lagged in terms of the value of green bonds as compared to China.

According to a survey conducted by Climate Bonds Initiative, Green Social and Sustainability bond worth USD 96bn was issued in November 2020 by 22 national governments, while 14 governments have shown their intention to issue such bonds in the future.

Usage of proceeds

The 2020 Q3 data shows the use of proceeds from 2018-2020, the proceeds are significantly used for energy needs, building, and transport projects stand second and third highest in the line. 

In Q3 2020, $69.4bn worth of  issuances were recorded, which was led by the USA raising USD 32.3bn then Germany with $21.4bn and France $17.8bn, while China has issued $9bn in Q3 of 2020. There were 73 new green bond issuers from 29 countries.

Motivation to Issue Green Bonds

In a survey conducted by Climate Bonds Initiative, many respondents stated that the biggest motivation to issue green bonds was to promote the local green bonds markets. They can have a huge impact on the growth of such a market by proving a role model for others while providing liquidity in investments at the same time. 

Meeting the larger strategic initiatives, mitigating climate change, and fulfilling their NDC and SDG targets formed a significant decision-making factor in issuing green bonds.

Reputational benefits, investor demand, cheaper pricing, and stakeholder expectations were other motivations to issue green bonds.

Ending Note

The need for sustainable investing has been felt more prominently with clear-cut visibility of its effects seen across the globe. Rising forest fires, extreme weather conditions, rising sea levels, frequent floods, earthquakes, and volcanos all point toward the rising problem. 

Sovereign green bonds can considerably help mitigate adverse effects and lead the economy on the path of sustainable development. As has been observed, India needs to buckle up to meet its several commitments and obligations. 

It can be achieved by providing incentives and tax benefits to retail investors to increase participation. The government has set its intentions clear by introducing and announcing measures to create an environmentally friendly economy down the line. It’s time to show that development and sustainability can go hand in hand, and overall welfare should persist for the greater good of society.

For now, this bond issuance is not meant for individual investors, but only for institutions who can afford a big ticket size.

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