A green bond, in simplistic terms, is a debt instrument, like any other bond, through which investors can finance sustainable assets or projects. As clarified by the finance minister, the proceeds from the issue of sovereign green bonds will be deployed in public sector projects which help in reducing the carbon intensity of the economy, such as electric vehicles, mass rapid transport systems and renewable energy.

As a means of finance, green bonds are fairly new and have garnered a lot of traction in the past decade, with issuers like Yes Bank, EXIM Bank, and Axis Bank raising debt for renewable energy, water management and low-carbon building projects. As green bonds are issued for projects ear-marked as ‘green’, they have the potential to attract a larger pool of investors globally in view of the rapid integration of environmental, social and governance (ESG) metrics in the process of investment analysis.

Apart from being a good alternative to conventional bank debt which is subject to sectoral limitations, green bonds are an effective tool in driving down cost of capital and reducing asset liability mismatches. Pertinently, as of date, India has the second largest bond market among emerging markets after China. However, India’s green bond market is roughly less than a tenth the size of China’s, which points to the country’s untapped potential.

The development and growth of a green bonds market in the country may see entry of new participants such as debt aggregators which pool loans from banks or developers and issue green bonds, securitising cash flows from the loan pool. It is imperative to highlight in this context that the performance of green bonds would ultimately depend on the robustness of the bond market in the country. India’s current sovereign credit rating indicates that many green bonds would also require credit enhancement in order to attract international investors. Furthermore, it must be borne in mind that policy measures like the imposition of ‘Basic Customs Duty’ on import of solar modules and cells into India from April 2022 will result in an increase in the overall cost of solar power projects. Regulatory uncertainty is also created by situations where tariff is unilaterally revised or allotted tenders are cancelled.

Considering the tumultuous economic and environmental climate that the world is experiencing today, adopting a proactive stance on issues which have repercussions on the industry as a whole is a welcome step. The government’s initiative to promote green bonds as a form of debt funding, for a sector integral to the overall issue, is the need of the hour. Failure to act now may force us soon enough to shift from a ‘proactive’ to a ‘reactive’ sustainable development policy, having to think even ahead of green bonds as a potential mitigation tool.

This article was originally published in Financial Express on 28 February 2022 Co-written by: Deepto Roy, Partner; Pranav Nanda, Senior Associate; Siddharth Jain, Associate. Click here for original article

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