[Chirag and Ashlesha are students at Hidayatullah National Law University.]
The 21st Conference of Parties has pushed for a decarbonization regime. India, with its rapid growth, has a higher burden as well, where it needs to align economic and environmental aims to create a sustainable economy. One such interesting step towards sustainable economic development is green bonds.
Green bonds are financial instruments issued to raise capital for environmentally beneficial projects, supporting sustainability, climate change mitigation, and the transition to a low-carbon economy. They fund sectors such as renewable energy, energy efficiency, sustainable transportation, waste management, and green building. Investing in green bonds enables individuals, institutions, and funds to contribute to environmental stewardship, combat climate change, and maintain financial security.
However, the Indian market has seen a considerable dearth of growth and investment in green bonds due to multiple challenges. Despite the versatility and noble aims of green bonds, they are not lucrative or secure options in the eyes of investors. This article sets out to examine a few such challenges while offering consolidated and sustainable solutions for the same.
Ranging far and wide from lack of awareness to the absence of reliable legislation, the green bond regime in India is developing at best, albeit at a considerable pace.
No specific regulatory framework
The efforts of the Securities and Exchange Board of India (SEBI) to streamline India's green bond framework led to revised disclosure requirements. The framework lacks standardized criteria and the involvement of uncertified third-party reviewers poses a corruption risk. The "comply or explain" (Regulation 1.8) regime focuses on post-dating environmental impact and lacks accountability for issuers. Non-compliance reasons are listed without specified repercussions. The annual report requirements have serious flaws as well, where the environmental damage is not quantified in measurable terms. While SEBI provides qualifiedmetrics, they are vague, allowing corporations to evade specific numbers without consequences using terms like "qualitative performance indicators”, "unascertained impact," (Regulation 2.3(b)), and "assumption for preparations” (Regulation 2.3(c)). Further, there exist no conclusive definitional criteria for various terms, including the key word “green”, which often leads to lack of standardization.
Lack of standardization
Sovereign green bonds (SGB) serve as a benchmark for private players in developing their green bond metrics. However, a lack of standardization in defining "green" for green bonds creates a gap in India. The absence of clear criteria to assess environmental impacts and determine eligibility for green bond issuance makes it challenging for investors to make informed decisions and compromises the legitimacy of these bonds. Consequently, this lack of standardization discourages international investment as India's definition differs from the global standard. This often leads to higher chances of greenwashing since companies have broader leeway due to lack of set standards.
Greenwashing is the deceptive promotion of a company's eco-friendly image, and it is prevalent in the green bond industry. Some bonds are labeled as "green" despite not meeting the specified criteria. With no universally recognized standard or legal definition, determining the true "greenness" of bonds is challenging. This uncertainty has led to growing skepticism about the credibility of green bonds. Questions arise about what qualifies a bond as green, such as compliance with the ICMA Green Bond Principles, inclusion in a green bond index, or confirmation by an independent third-party review. The lack of explicit investor protection provisions defining green bonds poses a significant risk of greenwashing and related issues.
Higher costs of issuing
The high cost of issuing green bonds in India poses a challenge for the market. Green bonds are initially costly but provide long-term cost savings. In the United States, green bonds have higher costs than corporate bonds for 5-10 years, but lower costs for longer maturity periods. In contrast, in India, green bonds continue to be more expensive than corporate bonds across all periods. This increased cost is due to information asymmetries, perceived risk, and governance concerns. Unlike other nations, India lacks a comprehensive database of green projects, making it difficult to gather accurate information about available initiatives.
Engagement of private players
The first two auctions of SGBs by the RBI in January 2023 were highly successful, with over four times the number of bids compared to the available bonds. Interestingly, these auctions were successful despite the slightly lower yields compared to similar government securities. This highlights the strong demand and untapped potential of India's green bond market. However, while this is a positive development for the public through SGBs, no significant steps have been taken to involve the private sector, which creates uncertainty and overlooks an important sector in the market structure. Further, private players, to promote uniform investment methods, prefer trade and investment mostly in US dollars. The Indian green bonds, issued in the Indian Rupee, fall short here.
Pre-dominance of rupee bonds
Green bonds in India are primarily issued in rupees and held by domestic banks, insurers, and the Reserve Bank of India (RBI). However issuers generally prefer to issue green bonds in dollars due to the virtue of dollar being widely accepted currency globally, resulting in reduced interest from issuers. The dominance of the Indian Rupee in green bond issuance hampers foreign investment in India's market, limiting the effectiveness of green bonds and missing out on foreign investment opportunities. This structural issue underutilizes the potential of green bonds.
Standardization via public sector
India needs to establish clear criteria for green bonds, similar to international standards set by organizations like the Climate Bonds Initiative (CBI). Transparent and measurable criteria will enhance accountability and provide investors with a clear understanding of project eligibility and environmental impact. The government's promotion of green bonds can provide a reliable qualification for "green projects." China and France have already seen positive outcomes from their respective green bond frameworks, which have increased the legitimacy of green bond qualifications.
Coming to legislative terms, there can be concerted guidelines that can determine whether or not a project is legible for green bonds- while being in line with global standards. SEBI’s revised requirements tackle the former question to some extent with its obligations of disclosure of aims, objectives, and environmental impact assessments for projects, but to standardize such a qualification, the proposed benchmarks should focus on science-based criteria. India’s robust scientific regime and its exponential development in recent decades would further help streamline the criteria as per national needs and available, feasible, and economical technologies. Secondly, the framework for green bonds in India should align with both India's nationally determined contributions (NDC) and global standards. This might seem challenging, but it can be simplified by adopting international standards at the domestic level while maintaining a comparative approach.
In this model, the impact assessment of projects can be viewed in two ways. Firstly, a domestic standard will be established, which will have equivalent criteria for projects with domestic investments. Secondly, for projects with foreign investments, there will be a similar but not identical standard that takes into account the international perspective. By adopting this approach, India can ensure that its green bond framework is in line with its own environmental goals as well as global expectations. It allows for flexibility while maintaining a comparative basis, taking into consideration the specific context of projects with foreign investments.
Certification for legitimacy and project transparency
SEBI’s requirement for certification aims at roping in third-party, independent auditors for certifying the “processes including project evaluation and selection criteria, project categories eligible for financing by green debt securities, etc.” Increasing the liability on corporations themselves, however, renders the odds towards inherently favourable reports, possible cartels, and bogus associations of such auditors. Since the framework further does not specify the absolute roles and responsibilities of such reviewers, the chances of maladministration increase as well. In such a situation, the thrust must shift towards the creation of a statutory body, akin to CBI, Center for International Climate Research or Det Norske Veritas and Germanischer Lloyd, but on a domestic level. When read with the previous suggestion, the requirements of certifiers along with criteria for legitimacy can be appended to the legislation itself. There is also a dire need for less ambiguity, which can be done by adopting the internationally accepted standard for the meanings and metrics of assessments and qualifications. Similar mandates have also been suggested by the International Finance Corporation of the World Bank group.
Further, in certain cases, an increased corporate social responsibility (CSR) may be adduced to corporations, too. CSR provides for the fulfilment of social objectives. After a certain threshold companies can be directed that some number of future projects can be dealt with in green bonds. Plus, companies in environment-related products shall be advised of the use of green bonds in some manner. This can engage the private players/companies into the green bond scheme and further could help in fruitful utilization of green bonds.
There is ongoing discussion regarding the implementation of explicit tax incentives for green bond issuers and investors, considering the urgency of public policy imperatives. However, significant jurisdiction-wide tax incentives for green bonds have yet to be established, with Singapore and Malaysia having made progress in this area concerning green financing. One argument against these incentives is that green-labelled bonds lack enforceable contractual rights to ensure the proceeds are used as disclosed, potentially leading to unintended subsidies for non-green bonds. This concern can be addressed by offering tax incentives specifically for bonds with clear and enforceable green-focused terms or by providing back-ended tax benefits upon bond maturity, contingent upon demonstrating compliance with the disclosed green purpose. Such measures would not only strengthen the green bond market but also enhance public policy clarity. To achieve sustainable development, India should consider providing tax incentives that incentivize green bonds while delivering positive environmental outcomes.
Reconciling sustainability with economic development has been a global goal for almost all nations- and as far as India is concerned, the nation is headed on the correct path- even though the realization of NDCs may seem like a far-fetched goal. With green bonds, there has been a new realm of amalgamated solutions- but their whole potential remains untapped. However, the primary step would be consolidated legislation that streamlines the framework via which other solutions such as tax incentivization, global standardization and increased CSR can branch out. Nonetheless, SEBI’s efforts remain laudable in this relatively novel regime but the lack of parity with global players renders the solutions unviable in the vastly globalized economy. Active promotion and increased awareness, too, can be the initial steps toward expanding the horizons of green bonds.