A green sovereign bond issuance from India is expected to find traction with global investors with large pools of capital dedicated to green causes, even though it will be an onshore rupee-denominated bond. However, the effect of a sovereign green bond goes well beyond raising funds at competitive rates or divers ification of source of funds. It demonstrates the country’s commitment to decarbonisation and other climate goals.
Sovereign issuers can serve as role models for other types of issuers and contribute to the development of the green finance market. There is already precedent for this in India, with state-owned enterprises being the earliest issuers of green bonds. These issues catalysed the growth of green issuance in India to nearly $10 billion (including green and other labelled bonds) in 2021.
Green sovereign issuance also brings in additional collateral benefits. These include enhanced collaboration with different stakeholder groups and providing additional transparency into public spending for investors and citizens.
What can we learn from other sovereign green issuances?
As per a
survey of nineteen sovereign issuers of Green, Social, and Sustainability (GSS) bonds (eight developed, and eleven emerging markets) conducted by Climate Bonds Initiative, on average, 44% of GSS bonds were allocated to green investors, and at least eleven issuers gave preference to investors describing themselves as green or socially responsible. On reasons to issue, climate change and growth of the local GSS market ranked highly across developed and emerging markets, but there were differences. Developed markets rated investor demand as a reason substantially higher than emerging counterparts, while emerging markets valued better pricing and reputational benefits higher.
In terms of pricing outcomes, out of the 23 sovereign GSS bonds issued by the 19 issuers, nine bonds had a greenium (lower yield than the existing yield curve), ten were similarly priced, and four bonds had a higher yield.
Lastly, sovereign GSS bonds often finance expenditures from current or previous budgets, and not newly created projects. The expenditures typically fell into three categories – tangible, intangible, or combined. Tangible expenditures include anything from renewable energy projects, energy investments in public buildings, or water conservation projects. Intangible expenditures included incentives to promote public transportation, training programs to increase technical knowledge, or research programs in biodiversity or marine conservation.
What comes next?
There is no shortage of current government projects that could be refinanced. These include railway electrification, metro railways optical fibre infrastructure, support facilities for wind and solar power plants, and assets needed to create adaptation like the National Adaptation Fund.
Currently, the utility scale renewable energy is attracting the bulk of the green investments. The market has a strong domestic project financing ecosystem. Since the mid-2010s, as the grid connected renewable energy projects have grown, and local commercial capital has replaced multilateral lenders like the IFC, which has tilted the financing landscape. With growing comfort, interest rates have come down substantially, and India has become a destination for price discovery of grid connected renewable energy. These assets have often been refinanced by bonds in the offshore markets.
However, investments in other segments have been sparse due to a variety of reasons, including nascent stage of industry and lack of strong policy support. The green sovereign bond may signal that policy support is in the anvil, and attract the interest of private investors beyond grid-connected RE. Hopefully all this will accelerate the transition to a green economy.
Finally, practical details need to be worked out. For example, what is the optimum size of issuance, the assets that can be tagged, and the modality of issuance (use the existing auction systems or explore alternatives).
Meeting the goals outlined in the CoP26 requires not just the greening of a few sectors but the transition of the entire Indian economy to a pathway that is in line with net zero carbon by 2070. The sovereign green bond market is key to facilitating such a transition.
(By Sandeep Bhattacharya, India Projects Manager at Climate Bonds Initiative and Sivananth Ramachandran, CFA, CIPM, Director Capital Markets Policy, India at CFA Institute. The views are the authors own)
