• India is ranked second after China among the emerging market economies in terms of issuance of green bonds, Minister of State for Finance Pankaj Chaudhary informed the Lok Sabha.

• The minister said there have been 11 issuances of green debt securities till date, under SEBI guidelines, by private and public sector entities in India amounting to Rs 3,099 crore.

• The Union Budget 2022-23 has emphasised sovereign green bonds and thematic funds for blended finance in areas, including climate action. Sovereign green bonds would be issued for mobilising resources for green infrastructure as a part of the government’s overall market borrowings in 2022-23. The proceeds would be deployed in public sector projects which help in reducing the carbon intensity of the economy.

What are green bonds?

• Green bonds are committed to financing or refinancing investments, projects, expenditure or assets helping to address climate and environmental issues. 

• Both governments and companies use them to finance the transition to a more sustainable and low-carbon economy.

• A green bond is differentiated from a regular bond by its label, which signifies a commitment to exclusively use the funds raised to finance or refinance green projects, assets or business activities. Green projects are projects that promote progress on environmentally sustainable activities. 

• Green bonds provide an opportunity to mobilise capital for green investments.

• The green bond market can provide an additional source of green financing to bank lending and equity financing, and enable long-term financing for green projects in geographies where the supply of long-term bank loans can be limited.

Evolution of green bonds

• Multilateral Development Banks (MDBs) initiated the development of the green bond market in 2007-2008, with the European Investment Bank (EIB) and the World Bank leading the way. In July 2007, the EIB issued the first green bond called Climate Awareness Bond (CAB) worth €600 million, which focused on renewable energy and energy efficiency. 

• The following year, the World Bank launched its first green bond of approximately $440 million in response to specific demand from Scandinavian pension funds seeking to support climate focused projects.

• Since then, the green bond market has grown substantially in size and sophistication.

• In 2010, the International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD) and other public entities (governments, agencies and municipalities) joined and issued $4 billion worth of green bonds.

• More countries joined the green bond market in 2015, contributing to a total annual issuance of $41.8 billion.

• Today, the annual green bond issuance continues to grow rapidly. 

• The green bond market needs to grow more quickly to achieve the targets in the Paris Agreement.

• According to experts, global green bond investment is expected to reach $1 trillion soon.

• The dominant market standard is the Green Bond Principles(GBPs). This voluntary standard, initially based on best practice guidelines established in 2014 by a consortium of investment banks, has since been developed and monitored by an independent secretariat hosted by the International Capital Market Association (ICMA). The guidelines were updated in 2018 and June 2021, and they are the de facto global standard.

• The European Union is a global leader in green bonds, with 48 per cent of global issuances in 2020 being denominated in euros, and 51 per cent of the global volume of green bonds being issued in the EU. In terms of volume, the US, Germany, France, China, the Netherlands, Sweden and Spain are among the top countries worldwide.

Need for green bonds in India

• India started issuing green bonds in 2015. Although the value of green bonds issued in India constituted a very small portion of the total bond issuance, India maintained a favourable position compared to several advanced and emerging economies. 

• India has embarked upon an ambitious target of building 175 gigawatt of renewable energy capacity by 2022 and this requires a massive estimated funding. 

• Infrastructure financing in India has traditionally been supported by institutions such as banks, NBFCs and financial institutions. However, given the huge investment requirements in infrastructure space, it is widely accepted that current project financing sources may not be sufficient for capacity addition. Thus, there is a need to introduce new means of financing and innovative financial instruments that can leverage a wider investor base. Corporate bond markets have long been considered towards providing this much required alternate source of financing.

• The financing needs of renewable energy space require new channels to be explored which can provide not only the requisite financing, but may also help in reducing the cost of the capital. Green bonds as a part of corporate bonds space may be one of the answers to this problem.

• The cost of issuing green bonds has generally remained higher than the other bonds in India.

• While there have been improvements in public awareness and financing options, the major challenges could be high borrowing costs, false claims of environmental compliance, plurality of green loan definitions, maturity mismatches between long-term green investment and relatively short-term interests of investors.

• Developing a better information management system in India may help in reducing maturity mismatches, borrowing costs and lead to efficient resource allocation in this segment. 

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