Green bonds have been around for a decade but regulation and investment in them is still minuscule

The Indian government has set an ambitious target of generating 100GW of energy from solar energy sources and 60GW from wind energy sources by 2022. As of March 31, 2016, the corresponding figures stood at 6.76GW and 26.7GW respectively. Unfortunately, renewable energy is more capital-intensive than coal, and financing this push will require $160 billion of capital, $120 billion as debt, and $40billion as equity.

Currently, most renewable projects are financed by bank commercial loans at 11-12 per cent interest per annum. The Indian banking sector is currently going through a balance sheet adjustment; banks are unlikely to be able to expand their balance sheets to be able to finance the additional requirements of the renewable sector. Green bonds may be able to fill this gap.

Classifying green bonds



A green bond is a fixed income instrument for the purpose of raising debt capital through markets. It certifies that the proceeds will be used exclusively for specific “green” purposes. The Green Bond Principles are voluntary guidelines issued by the International Capital Market Association which states the procedure for certifying a green bond. These encompass the use of proceeds, the evaluation procedure, the management of proceeds, and financial reporting. These guidelines are lacking in specifics, leading to a lack of consensus on what classifies as a green bond. Green bonds can provide a long-term source of debt capital for renewable infrastructure projects. Since the cost of debt availed for projects is higher than the yield for investment-grade bonds, it may be possible to reduce cost of capital for green infrastructure financed or refinanced by bonds. While green bonds can facilitate the flow of capital to low carbon infrastructure investments, the demand for such investment is driven by low-carbon policy mandates. An enabling policy context is therefore vital for the success of green bonds.

There are many ways by which the government currently provides subsidies for green projects. The first is through accelerated depreciation provisions, whereby capital expenditure is allowed to be depreciated by 80 per cent in the first year and the remaining in the following five years. Feed-in tariffs are long-term contracts with discoms to purchase power from a renewable project, usually at higher rates. A viability gap funding is a capital grant from the government that bridges the gap between project cost under the prevailing electricity rate and the price quoted by the developer. Under a generation-based incentive, the government provides Rs. 0.5/kWh (kilowatt hour) supplied to the grid, subject to a cumulative maximum of Rs.10 million/MW. The incentive must be drawn over a minimum of four years and a maximum of 10 years. Under renewable purchase obligations, the National Action Plan on Climate Change (NAPCC) has set an ambitious RPO target of 15 per cent by 2020.

Green bonds would enable investor diversification, mitigate risks since the repayment is tied to the issuer only, build a community of green investors, and enable refinancing bank loans at a lower cost. Assets under management by signatories to the UN-supported Principles for Responsible Investment (PRI) are around $60 trillion so far, and an increasing number of institutional investors and financial institutions globally are publicly pledging to increase their green bond holdings.

Since February 2015, some banks and companies too have raised funds via green bonds. Currently, there is no pricing advantage for banks in issuing green bonds and likewise to the borrowers whose projects were invested in.

Developing a green bond market



Green bonds have been around for a decade but regulation and investment in them is still minuscule compared to the total market for debt mainly on account of lack of green bond standards, low credit rating of potential issuers, and higher cost of issuance. Considering that fossil fuels have enjoyed huge subsidies throughout their history (namely, subsidised diesel, kerosene and gas) and have contributed to environmental degradation and global warming, it is apt that clean energy initiatives get equitable treatment. In order to develop a green bond market, the government essentially needs to increase the funds available for investment in green projects, by providing for specific tax incentives and development of long-term finance markets in general.

Some of the key actionable steps would be changing Insurance Regulatory and Development Authority norms for size of investment for insurance companies, creating mandates for provident funds to invest in infrastructure and environmentally sustainable projects, increasing the priority sector lending limit for bank loans under solar energy from a meagre Rs.15 crore, standardising the definition of green to be able to target government efforts in the direction, and mobilising retail savings by way of tax exemption on the lines of Section 80CCF.

Though the market is nascent, broad guidelines are coming to the fore. As the market matures, investors will require that green bond issuers report on status of deployment and environmental outcomes of the investments. For the green bond market to have long-term credibility, investors and governments would need evidence that the projects funded have in fact delivered the intended environmental benefits. The Indian government can lead the global push towards green by taking three steps to reduce our races’ carbon footprint: standardise “green” bonds as a way to finance environmentally sustainable projects, provide incentives to investing in projects funded by a carbon tax on polluting sources of energy and, finally, increase funds channelled towards investing in environmentally sustainable projects.

Saurabh Roy is a Fellow at Pahle India Foundation