Despite being the fastest growing large economy in the world, India’s need for investments as a developing economy would remain unabated for serving the second largest population. This has to be consistently looked at with new paradigms of climate change which has additional investment requirement for mitigation but more so for adaptation. A Global Infrastructure Hub (GIH) report estimates the investment requirement of India in order to meet the Sustainable development goals at USD 5.33 trillion by 2040[i]. Raising capital would be critical to tread a low carbon development pathway for India.
Green Bonds have been the latest innovations in raising capital across the globe for climate positive outcomes. These instruments have caught the imagination of international market and have seen steep growth, reaching USD 161 bn in 2017 and are expected to reach USD 250 bn this year. It can be understood as a plain bond instrument with additional disclosures on the projects that it is going to fund and the climate outcomes. Based on the data collected by Climate Bonds Initiative, these bonds have seen practically all types of issuers including corporate, financial institutions, sovereign, municipalities, etc. across multiple currencies and niche formats like the Indonesian sukuk bond. India jumped this band wagon in 2015 and is currently among the top 10 issuers of green bonds in the world with potential to do much more[ii] .
The effective tagging and assurance of green assets though may have additional cost to the issuer; the Green Bonds benefits may be extensive including attracting new set of investors with positive public perception as a bonus, although a ‘greenium (green premium)’ may have to wait for market to mature [iii], [iv] . At a country / economy level, it helps garner resources for the climate relevant sectors of the economy which may comprise of basic services like clean energy, water and sanitation service, rail transport along with forestry, green buildings and transportation. However, a developing country like India may reap the complete benefits through issue of a Sovereign Green Bond which may include:
• SET POLICY DIRECTION FOR INVESTMENTS AND TAKE A GREEN LEADERSHIP IN THE GLOBAL MARKETS: France has been among the first countries to issue a sovereign green bond and has done that four times since with a total issue of USD 10.8 billion. This has helped France set the investment climate towards green investments internally [v]. These actions have also helped France emerge as a climate leader globally post the COP 21 Paris in 2015.
• IDENTIFYING ITS OWN SHADE OF GREEN: Green has often been loosely defined even by best global standards and always taking global standards may not be in the interest of the economy. China was one of the first countries to issue green bond guidelines and has backed it up with granular issues for different business segments [vi]. This has helped the market to grow manifold and take the pole position in international climate aligned issuances in the country. Issue of a sovereign green bond would preclude such a definition aligning the green investment market for India.
• GREEN TAG BUDGETARY EXPENDITURE AND STREAMLINE POLICY EXPENDITURE ON CLIMATE: Setting the green shade for India would also help streamline budgetary expenditure for different Governments and statutory bodies towards equivalent green projects and schemes. It can further help set climate accounts for the country bringing in better accountability and expenditure tracking from the private sector as well. Sovereign green bonds may be able to raise standalone resources for these policies financing.
• CREATING AND INNOVATING ON POLICY PRODUCTS USING THE GREEN TAG: Project assurance for green bonds may also help set innovative policy incentives like credit guarantees for green bonds without setting up additional due diligence framework. Governments like Singapore[vii] , Hong Kong[viii] and Japan[ix] are also providing subsidies for covering the assurance cost for the issuers to support market growth. Green government securities may be further used to fund these innovative schemes and policies which facilitate green tagged investments.
• CREATE A LARGER MARKET AND HELP DRIVE LOWER YIELDS IN THE FUTURE:The steep growth in green bonds market may further help it to be considered as a separate asset class. Although the lower yields and high demand prevalent currently for the green bonds may not immediately signify a definitive lower cost for the issuers[x] , the greater market depth in future especially with highly liquid government securities may help carve out a green and preferably lower yield curve.
India has taken steep Nationally Determined Contribution (NDC)[xi] targets requiring very high expenditure in energy, agriculture, transport, water management and other sectors. Green Bonds present an opportunity for India to tap on to climate positive segments. As many as 9 countries[xii] have used the sovereign green bond route to help fund NDC targets and achieve sustainable development goals raising USD 21 bn. It is high time India actively looks to garner resources and to giving a greener share to government securities.
[xi] NDCs are India’s formal declaration to the world on the actions that it would take to avoid climate change
[xii] Fiji, Nigeria, Indonesia, Belgium, Lithuania, Poland, France, Hong Kong, Ireland