What are green bonds?
The Organisation For Co-operation and Development (OECD) defines green bonds as a type of bond which “is a commitment to exclusively use the funds raised to finance or re-finance “green” projects, assets, or business activities.”1 Essentially it is a fixed income debt instrument which is issued for the purpose of receiving capital from investors for sustainability oriented activities. The difference between regular bonds and green bonds lies only in the purpose of the project concerned i.e environmental sustainability.2
In the global context as of January 2023, the Green Bond Market has internationally accrued over 2.5 trillion US dollars. 74 billion US dollars have been raised by emerging markets which is approximately 2% of the total green bonds is used worldwide. Therefore, there is potential for growth in particular for economies such as India. Interestingly as the market for green bonds has grown , investors are more aware of the overall impact of the capital they invest i.e environmental impact.3
Indian Context
Now India in lieu of the Paris Agreement submitted its 2030 climate targets which includes the reduction of emission intensity by 45% compared to 2005 and increasing the share of non-fossil fuel based energy resources to half of the installed capacity. In order to achieve these goals India requires approximately 170 billion US dollars per year via investment. But as of 2023 the average investment per year is $ 44 billion. There is a huge short fall in the same. 4
Therefore, in order to tackle the issue of financing, in 2022 , India planned to issue soverign green bonds to mobilize resources for green infrastructure. In Jabuary 2023 India issued the first tranche of its own sovereign green bond for the purpose of raising capital for the purpose of financing projects which would combat climate change. According to the head of the World Bank Sustainable Finance and ESG Advisory Services Ms Farah Imrana Hussain, “India’s green bond will have a huge impact, not only contributing to its nationally determined contribution (NDC) to the Paris Agreement, but also encouraging other countries to raise private capital for environmental priorities.” . 5
Legal Framework – Government and SEBI
On 9th November 2022 the Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman approved what is known as the Sovereign Green Bonds framework of India. The framework is meant to achieve India’s climate change targets which were reiterated by Prime Minister Modi during COP26, Glasgow in November 2021. It aims to attract foreign and domestic investment in environmentally sustainable projects. The same was approved in the Union Budget FY 2022-23. In order to cover important decisions regarding sovereign green bonds , the Green Finance Working Committee (GFWC) was formed. (Ministry of Finance , Government of India) Additionally, the Centre for International Climate and Environmental Research (CICERO), was appointed for the purpose of evaluating India’s Green Bond Framework in relation to international standards, upon successful evaluation the rating awarded was ‘Medium Green’ along with a governance score of ‘Good’.6
Now given the large amounts of capital involved it would not come as a surprise if entities attempted to greenwash themselves in order to gain access to said capital. The role of Securities and Exchange Board of India (SEBI), becomes apparent in this situation. In February 2023 , SEBI issued guidelines regarding green bond which would be in place from April 2023. The initial disclosure guide lines framed by SBI are as follows7:-
Initial disclosure requirements for issue and listing of green debt securities
1. An issuer desirous of issuing green debt securities shall make the following additional disclosures in the offer document for public issues / private placements:
1.1 A statement on environmental sustainability objectives of the issue of green debt securities;
1.2 Brief details of decision-making process followed/proposed for determining the eligibility of project(s) and/or asset(s), for which the proceeds are being raised through issuance of green debt securities, such as:
a) Process followed/ to be followed for determining how the project(s) and/or asset(s) fit within the eligible green projects categories as defined under Regulation 2 (1) (q) of NCS Regulations,
b) The criteria making the project(s) and/ or asset(s) eligible for using the green debt securities proceeds; and
c) Details of taxonomies, green standards or certifications both Indian and global, if any referenced and the alignment of projects with said taxonomies, related eligibility criteria, and exclusion criteria, if applicable.
d) Details of the alignment of the objective of the issue with the India’s Intended Nationally Determined Contributions in case of the proceeds raised though issuance of transition bonds
1.3 Details of the system/procedures to be employed for tracking the deployment of the proceeds of the issue.
1.4 Details of the project(s) and/or asset(s) or areas where the issuer, proposes to utilise the proceeds of the issue of green debt securities, including towards refinancing of existing green project(s) and/or asset(s), if any.
1.5 Details of an indicative estimate of distribution of proceeds raised though issuance of green debt security between financing and refinancing of project(s) and/ or asset(s); if applicable.
1.6 Details of the intended types of temporary placement of the unallocated and unutilised net proceeds from the issue of green debt securities
1.7 Details related to the perceived social and environmental risks and proposed mitigation plan associated with the project(s) proposed to be financed/ refinanced through the proceeds from the issue of green debt securities
1.8 The issuer shall appoint an independent third party reviewer/ certifier, for reviewing/certifying the processes including project evaluation and selection criteria, project categories eligible for financing by green debt securities, etc.
The said requirement of appointing a third party reviewer/ certifier is applicable on a ‘comply or explain’ basis for a period of two years. ‘Comply or explain’ for the purpose of the above, shall mean that the issuer shall endeavour to comply with the provisions and achieve full compliance by two years from the date of issuance of the circular. In case the entity is not able to achieve full compliance with the provisions till such time, the issuer shall in its annual report, explain the reasons for such non-compliance/ partial compliance and the steps initiated to achieve full compliance
The standards set by SEBI are higher than the standards recommended by the International Capital Market Association (ICMA) which will be favourable for ESG oriented investors. Furthermore, pre-issuance and post issuance regulations will prevent greenwashing incidents like that which occurred in Brazil in 2014. Furthermore, there is mandatory alignment with Business Responsibility and Sustainability Reporting (BRSR) which would enable easier transition into the economy. Lastly as there is no international standard regarding greenwashing, the publication of a “Do’s and Don’ts by SEBI in regard to green bonds is a step forward in integrating the green bonds framework in India.8
Conclusion
I am of the opinion that the move of Indian Government in appointing regulatory authority like SEBI to look after the same and the guidelines framed by SEBI will bring confidence in the Investor to invest money in Green Bonds. It will further help India to strengthen its position as a world leader in terms of attracting investment as well as the technological innovation that would arise out of the concerned projects.
Authored by
Varun S Ahuja
Partner
and
Nithin P Pillai
Intern
Ahuja Law Offices
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1.Bloomberg Philanthrophies. Green Bonds Mobilising the Debt Capital Markets for a Low-carbon Transition POLICY PERSPECTIVES. OECD, 19 Apr. 2017, www.oecd.org/environment/cc/Green%20bonds%20PP%20%5Bf3%5D%20%5Blr%5D.pdf.
2.US Department of Energy. “Green Bonds.” Better Buildings, betterbuildingssolutioncenter.energy.gov/financing-navigator/option/green-bonds. Accessed 9 July 2023.
3. World Bank Group. “From India to Indonesia, Green Bonds Help Countries Move Toward Sustainability.” World Bank, Apr. 2023, www.worldbank.org/en/news/feature/2023/04/10/from-india-to-indonesia-green-bonds-help-countries-move-toward-
4.Dill, Farah Imrana Hussain Helena, and Farah Imrana Hussain Helena Dill. “India Incorporates Green Bonds Into Its Climate Finance Strategy.” World Bank Blogs, 8 July 2023, blogs.worldbank.org/climatechange/india-incorporates-green-bonds-its-climate-finance-strategy.
5. World Bank Group. “From India to Indonesia, Green Bonds Help Countries Move Toward Sustainability.” World Bank, Apr. 2023, www.worldbank.org/en/news/feature/2023/04/10/from-india-to-indonesia-green-bonds-help-countries-move-toward-
6,Union Finance Minister Smt. Nirmala Sitharaman Approves India’s First Sovereign Green Bonds Framework. pib.gov.in/PressReleasePage.aspx?PRID=1874788
7.Circular SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2023/023, Security and Exchange Board of India, February 6 2023, https://www.sebi.gov.in/legal/circulars/feb-2023/revised-disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_67837.html
8. Indian Capital Market Regulator’s Updated Green Debt Guidelines: Unlocking the Potential of Sustainable Finance | IEEFA. ieefa.org/resources/indian-capital-market-regulators-updated-green-debt-guidelines-unlocking-potential#:~:text=SEBI’s%20revised%20green%20debt%20securities,advance%20India’s%20energy%20transition%20efforts.
