The Indian green bond market accounts for 3.8% of the overall outstanding corporate bonds market. The slow uptake is seen due to heavy concentration of capital for solar and on account of most issuances being rupee denominated, as against the majority preference for issuances in dollars, as per a Fitch survey
India’s landmark delivery of the five-point agenda, or the panchamrit strategy, announced at COP26, has been instrumental in driving important conversations in the country. This entails increasing renewable energy capacity to 500 gigawatts, meeting 50% of India’s energy requirements through renewable energy sources, reduction in carbon emissions by one billion tonnes between now and 2030, 45% reduction in carbon intensity of the economy by 2030 and carbon neutrality and net zero by 2070.
These commitments have served as a good starting point for favourable policies that will not only help contribute to the Paris Agreement but also cater to India’s developmental challenges, thus enabling the country to maintain its position as one of the frontrunners in climate action globally besides feeding into its energy security aspirations.
Other than policy enablement, such a robust agenda requires significant amounts of capital. For instance, meeting India’s nationally determined contribution targets by 2030 alone would require Rs 162.5 trillion ($2.5 trillion), whereas total investments required to achieve net zero by 2070 are at Rs 716 trillion ($10 trillion). India has asked developed economies for a trillion dollars in climate finance and technology transfer; however, the sheer capital sitting within the domestic market remains untapped and serves as a big financial opportunity.
For example, India’s Sovereign Green Bonds, raising Rs 80 billion ($1 billion) for emissions reduction projects, were oversubscribed four times and the Reserve Bank of India (RBI) got a green premium on the coupon.
Having showcased the potential, the space still remains nascent and rife with challenges. At an institutional level, the gaps in green and climate expertise make environmental, social and governance (ESG) or climate risk considerations an uphill task. The demonstrated skills shortfall in banks and financial institutions, specifically across risk and credit teams, is a major challenge. Climate risk management practices are limited to the “E” and the “S” part on account of international borrowing, with few explicit linkages to loan pricing, tenure or towards quantification of ESG risks for financial implications. There are a few institutions which have begun their journey for climate scenario analysis or stress testing; however, a lack of data availability, measurement matrix and collection tools, combined with inadequate understanding of frameworks, serve as deterrents for disclosures on ESG and climate risks and impacts.
At a systemic level, regulatory barriers to green financing come from a lack of common green taxonomy, metrics or definitions. This has been impacting interpretations of the terms “green” and “sustainable”, leading to information asymmetry. While a “sustainable finance” taxonomy is on the anvil in India, a specific regulation on climate risk assessment by the regulator will help create a level-playing field for banks, besides providing a systematic and comprehensive outlook of climate-related financial risks and opportunities. However, until then, regulatory gaps, along with a lack of standardised target setting and disclosures, are likely to impede larger capital flows to climate-aligned sectors.
In terms of green debt, currently, the Indian green bond market accounts for 3.8% of the overall outstanding corporate bonds market. The slow uptake is seen due to heavy concentration of capital for solar and on account of most issuances being rupee denominated, as against the majority preference for issuances in dollars, as per a Fitch survey. Additionally, the debate of “greenium” has left banks out, with a large part of issuances limited to corporate entities.
A survey preceding a discussion paper on climate risks was also an eye opener in many ways. By bringing out the gaps across all critical pillars of climate risk management—governance, strategy and risk management—it helped recognise important action points. For instance, capacity building was recognised as a key pillar to address climate risks, resulting in the Indian Banks’ Association and the Indian Institute of Banking and Finance releasing a slew of training programmes for banks’ board of directors, management and employees on related topics.
The discussion paper also suggests good practices for banks to address climate-related financial risks. While a combination of such deliberate actions is bound to shape the direction of climate action within the formal financial sector, it is also important to move from the “what” to the “how” part prudently and proactively through implementation. Thus, factoring in the minimum practices, areas and guiding principles that banks can immediately explore would be useful to navigate complexities and for level setting with global developments.
The other question is on transparency and accountability, wherein mandating a disclosure framework for banks will be vital to legitimise climate action. Disclosures in line with accepted frameworks are imperative to manage climate risks and opportunities.
The guidelines of the Securities and Exchange Board of India (SEBI) on disclosures of green debt securities back in 2017 kickstarted a market in India with issuances reaching approximately $18 billion between 2012 and 2021. Similarly, the rapidly evolving global scenario on sustainable finance has led the regulator to consider strengthening of the existing guidelines. As proposed, SEBI further aligning the guidelines with the updated Green Bond Principles will certainly avoid potential run-ins in global markets while ensuring recognition of domestic green bond issuances.
Additional measures such as India’s sovereign green bond framework, which was published in October 2022, do provide clarity on the sectors that will receive the proceeds, thus, in a way, setting a starting point for green standardising. SEBI’s consultation papers Green and Blue Bonds as a Mode of Sustainable Finance and Consultation on ESG Disclosures, Ratings and Investing are a few other measures that are slated to lead to transparency and investor pull to lay the groundwork for climate action from all quarters.
Introduction of the concept of blue bonds, in particular, will open up a significant investment opportunity, especially as a national policy for blue economy is in the pipeline. However, unless there is a strong backing by risk mitigation products, like credit enhancements or guarantees to lower financing cost, or credit default swaps for increased investors protection, this space will remain deficient of capital.
Lastly, the elephant in the room is “greenwashing”. SEBI’s proposed framework to regulate ESG rating providers is particularly refreshing and will assuredly bring in the required authenticity to green or ESG capital deployment, transparency and clarity on green financial flows. Further, a common formula to ensure that there is no difference in the ratings for the same company from two different rating agencies will provide a level-playing field to both lenders and borrowers.
On the whole, regulatory actions and the intent of supporting green finance in India indicate a massive shift in the country’s financial sector. Backed by data authenticity, quality, timeliness and granularity, these measures will pave the path for informed decision-making and appropriate climate risk evaluation, securing the space from greenwashing.
Preparedness and readiness will also depend on the ability to act urgently on building capacities at systemic, institutional and individual levels. However, with non-financial risks and opportunities doubling down, ensuring that capacities and systems are adjusted accordingly is the only way forward for greening the Indian financial sector.
Namita Vikas, Founder and Managing Director, auctusESG