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  • Divya Pinheiro

Towards a Sustainable Green Bonds Market in India: A Review of the Green Bonds Framework in India

[Divya is a student at School of Law, Christ (Deemed to be University), Bangalore.]

For a long time, most investors made their investment decisions based on the likelihood of making profits or the chance of higher returns. However, recent years have seen an increased interest in the role played by corporates in climate change. Corporate responsibility in this regard has garnered attention from legislators, activists, consumers and investors. Investors are increasingly basing their investment decisions on environmental, social and governance (ESG) issues. The COVID-19 pandemic has further compounded this shift in the focus of investment. A survey carried out in 2020 highlighted that 98% of investors surveyed also accessed the ESG strategy of a company, of which 72% conducted a structured review of a company’s ESG policy up from 32% that did so in 2018. This highlights the increasing requirement of companies to plan and align their portfolios towards better performance in ESG.

While still at a nascent stage in India, this trend of making investment decisions based on a company’s ESG policy is fast gaining traction. India has seen a general improvement in awareness about green investing. Mutual funds, in particular, have been quick to adapt to investing based on ESG policies; this is evidenced by an increase of 76% in inflows to ESG funds in the financial year ending 2021 against inflows in the financial year ending 2020. The success of using ESG as an investment metric lies in the idea that a robust, environment-friendly and socially responsible business practice ensures risk mitigation. The ‘environment’ aspect of ESG is essential given the dire condition of climate change today, with India alone accounting for 6.8% of total emissions in the world (2.3 billion metric tonnes). India’s Intended Nationally Determined Contribution document lays down its targets towards the goal of climate improvement, which suggests that at least USD 2.5 trillion will be required for meeting India’s climate change targets by 2030. The role that businesses play in reducing the impact of climate change becomes crucial. Companies can engage in meeting global climate change targets by investing in clean and renewable projects; such projects can be funded by green bonds. Such forms of fund-raising help investors identify projects that are in line with their value and want to be part of and acts as a means for companies to express their contribution to the initiative.

The Green Bonds Framework in India

Funds collected from issuing green bonds are set aside expressly for the purpose of financing ‘green’ or ‘environmentally friendly’ projects. Recently, the European Union issued its first ever green bond to record demand, which is indicative of how popular such bonds have been in the recent market. Yes Bank launched India’s first green bond in 2015 with a view to raising finances to be used for funding clean and renewable energy projects. More recently, Adani Green Energy issued its maiden USD 750 million green bond, which was oversubscribed 4.7 times. Despite India’s growth in the green bonds market, it does not have a dedicated law that adequately regulates it. The current regulatory regime consists of a memorandum and a circular (SEBI Circular) issued by the Securities and Exchange Board of India (SEBI). Additionally, the SEBI (Issue and Listing of Debt Securities) Regulations 2008, that apply to the issue of bonds in general also apply to the issue of green bonds.

The SEBI Circular sets out the asset or project categories that funding received through the issue of green bonds can be utilised on. However, it also allows, in addition to the eight categories mentioned therein, “any other category as may be specified by Board, from time to time”, which throws open the possibility of extending the projects that these funds can be used on. The SEBI Circular also attempts to mitigate the greenwashing of projects, and by extension, the misutilisation of funds by requiring that the issuer of such bonds disclose details of the project and/or assets that the issuer plans to use the funds on. Such conditions not only require the disclosure of details prior to the issue of the bonds, but also requires continuous and regular disclosures along with the issuer’s half-yearly and annual financial reports. If the issuer is unable to provide this information along with quantitative performance indicators, the reason for the same must be disclosed. The mandatory nature of these disclosures ensure that prospective investors have at the very least bare minimum information about the funds collected and the manner in which they are proposed to be used.

While the SEBI has relied on the International Capital Market’s Association’s (ICMA) Green Bond Principles, 2015 (2015 Principles) to determine the extent of projects falling under the scope of a ‘green’ project; it is also suggested that it consider applying international norms not just for determining the nature of the project that the funds can be used for, but also in the evaluation and selection of projects, the management of proceeds and reporting. In this regard, the SEBI Circular has also taken into consideration some of the 2015 Principles which require the issuer to provide an explanation of the decision-making process it undertakes while determining which projects to use green bond funds on and its sustainability objectives.

Potential Areas of Improvement in the Current Regime

The current Indian law also does not require the issuing organisation to conduct a review of the funds that are proposed to be issued. It leaves the appointment of an independent reviewer up to the issuers. However, if such reviewer is appointed, details of such appointment and the standards used for such review must be disclosed in the offer document. In this regard, it is suggested that this appointment of independent reviewers be made mandatory. This is in line with the 2021 Green Bond Principles, the latest edition of the ICMA’s Green Bond Principles, suggests that external reviewers be appointed to conduct a pre-issuance review of the green bond scheme and also provides guidelines for such reviews. The reviewers are expected to provide a report on the compliance of the scheme with the four principles of use of proceeds, process and project evaluation and selection, management of proceeds and reporting laid down under the Green Bond Principles. Such principles also suggest that the issuer appoint an external reviewer to verify the utilisation of the funds post issue as means of ensuring that a proper system of checks and balances exists. This ensures that all projects are appropriately audited and that prospective investors have a fair idea of the manner in which the funds are proposed to be used and whether these proposed projects are in line with international standards. Such information will further bolster the disclosure requirements laid out under the SEBI Circular.

The Climate Bond Standards is another well-recognised standard. These standards provide additional detail regarding the manner in which the primary principles laid down under the Green Bond Principles may be followed. Issuers that comply with these Bond Standards are given a certification; such certification can also act as a means for investors to determine the veracity of the scheme suggested by the issuer. India too can consider either coming up with its own standards of certification, or it can follow the Climate Bond Standards. In each instance, doing so will work in the favour of investors who would have access to a standard that allows them to compare schemes offered by various issuers.

Another challenge faced by the green bonds market is the cost of issuing such bonds; this cost is generally higher than the cost of issuing other bonds in India. While it has been found that green projects are often costly up-front, with cost-saving only manifesting in the long run. This trend can be seen with green bonds in the US, where while the cost of green bonds issued for a 5–10-year period costs more than corporate bonds issued for the same period, and the cost of green bonds that mature after ten years is lower than the price of the corresponding corporate bonds. This trend, however, is not seen in the Indian figures, with the cost of green bonds remaining higher than the cost of corporate bonds on both indices. This increased cost of borrowing under green bonds has been attributed to information asymmetry, higher risk perception and other governance issues. Unlike many other countries, India does not have a database of green projects, this adversely impacts its ability to garner information on available green projects correctly. Additionally, the higher risk perception can be tackled by increasing transparency through the measures suggested above which would also aid in reducing information asymmetry between the issuer and prospective investors.

Most green bonds in India are issued by public sector enterprises and corporates with good financial health. This trend needs to continue and also extend to include new products and segments. This will help build investor confidence during the initial phase of the market and thus can help the private sector tap into these resources at a later stage. Government bonds are typically associated with secure investments; continued public sector activity in this regard can also help reduce high-risk perception associated with green bonds. An illustration of such a step can be seen in the recent Green Financing Framework put out by the UK Government.


While green bonds are not the only source of raising funds for green projects, they are one of the most common methods of raising such ‘sustainable funds.’ The annual report of the BSE noted that the total amount mobilised through green bonds jumped from INR 8.65 billion in 2018-19 to INR 18.03 billion in 2019-20. A law that adequately considers the points set out above might be able to regulate the green bonds market effectively, ensure that funds raised through these sources are used in the manner prescribed and thus ensure that this investment tool can provide investors with the opportunity to invest in companies that more closely aligned with their values and goals and more importantly is one that is able to actively contribute to the mitigation of the risks associated with climate change.


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