Green Bonds: A Step towards Sustainable Future
Executive Summary & Core Policy Vision
The green bond market has grown rapidly in recent years. In Budget 2022, the Union Finance Minister proposed to issue green bonds as a part of the government’s total market borrowing in 2022-23, these resources will be mobilised for developing the green infrastructure. This is a significant step towards the nation’s commitment to reducing carbon intensity and achieving net-zero emission target by 2070.
This article highlighted the significance of green bonds and ESG investing. Further, it discussed the factors to consider for green bond issuers as well as suggestions for green bond market participants.
1. Introduction: ESG Investing & The Sovereign Green Mandate
Environmental, Social and Governance (ESG) investing also known as “sustainable investing”, “Socially Responsible Investing”, or “impact investing” refers to the integration of Environmental, Social, and Governance factors alongside financial performance factors in investment decision-making. ESG are the non-financial aspects for evaluating the sustainability and societal impact of the companies, which are further assessed by the socially conscious investors for making investment decisions. Responsible investors or socially conscious investors are those that consider non-financial factors as a part of their investment evaluation process to identify the material risks and growth opportunities apart from the financial factors. Such investors generally avoid making investments in “sin” stocks, such as firms involved in tobacco, gambling, and alcohol business.
Green bonds are a part of ESG investing (Outlook India, 2022). These are the fixed-income debt instruments intended primarily to raise funds for the environmental and climate-related projects. The first-ever green bond i.e., “Climate Awareness Bond” was issued in 2007 by European Investment Bank and World Bank (EIB, 2007).
Recently in Budget 2022-23, the Union Finance Minister mentioned energy transition and climate action as one of the visions of the government during the “Amrit Kaal”, the 25-year period leading up to India @100. She announced to issue sovereign “green bonds” as a part of the government’s total market borrowing and that resources will be mobilised for developing green infrastructure. The proceeds will be used to fund public-sector initiatives aimed at lowering the economy’s carbon intensity (Government of India, 2022).
The issuance of green bonds is a great step in the direction of the government’s commitment towards net-zero and becoming green economy. The Green bonds and ESG bonds are becoming attractive for the investors as it is based on the practice of Socially Responsible Investing which is regarded as valuable in the bond market in recent times. As our Indian corporates are adopting more sustainable business practices, the issuance of green bonds has increased significantly in 2021. From January 2021 to November 2021 more than a dozen companies issued green bonds and raised around $6.11 billion as shown in Figure 1, which is the highest from 2015 since the green bonds were first issued. Companies like JSW Hydro, Greenko, Adani Green are the large issuers of green bonds while Axis bank AT1, Ultratech Cement, Adani Electricity Mumbai are the larger fundraisers through ESG bonds in 2021.
2. Growth Trajectory & Regulatory Taxonomy
Figure 1: Volume of Indian Green Bond Issuance (US$ Billion) [2017–2021]
Source: Climate Bonds Initiative / S&P Global Market Intelligence (2022). Data compiled Nov. 30, 2021 (*Represents data up to Nov. 28, 2021). Green bonds are limited to those for which at least 95% of proceeds are designated for green projects aligned with Climate Bonds Taxonomy.
Green bonds are the debt securities issued by any sovereign organisations, inter-governmental groups or alliances, and corporates to raise funds for projects that are environmental and climate-related. Apart from government and companies, World Bank also issues green bonds for various projects in India from time to time. With a growing emphasis on environmentally sustainable and green infrastructure, investors are increasingly viewing investments in the industry as a kind of social and corporate responsibility.
SEBI Definition of Green Debt Securities (SEBI, 2017):
Securities and Exchange Board of India (SEBI, 2017) has defined green bonds as “debt securities in which the funds raised will be used for the project(s) and/or asset(s) that fall into the following categories”:
3. Catalytic Benefits of Green Bonds (Figure 2 Analysis)
The most important feature of green bonds is that they are focused on having a positive impact on sustainable development goals (SDGs) and environmental protection. Furthermore, because these bonds are issued for ‘green’ projects, their credentials have the potential to attract a bigger pool of global investors, given the fast incorporation of ESG indicators into the investment analysis process.
Given immense green investment needs, bonds are an appropriate financing instrument to fund such projects. As a new instrument, green bonds can leverage a wider investor base including institutional investors (such as pension funds, insurance companies and sovereign wealth funds) which can help channel funds to such long term projects.
Many countries, including India are constrained in their ability to provide long term finance due to liability maturity issues and lack of hedging duration risks. Funds of long term nature, from varying class of investors, can be channelled through long term bonds issuances, to mitigate this issue.
It is expected that with the need to encourage investment in Green initiatives, a larger pool of capital and investments may be made available to fund the same. Like is seen in the infra debt space in Indian infrastructure industry, there may be possibilities of regulatory tax benefits which may be given to green businesses, due to which the cost of such funding may reduce.
Pension funds, insurance companies, sovereign wealth funds and other institutional investors looking for new financial instruments can achieve investment targets. Green bonds provide portfolio diversification while global multilateral championing mitigates geopolitical risks for cross-border investors.
4. Current Trends in India: 2nd Largest Emerging Green Bond Market
India started green bonds in 2015. Looking at Figure 3 (IFC, 2021), India has the second-largest burgeoning green bond market among emerging markets after China. Yes Bank issued the first green bond in India in February 2015 to raise around 1,000 crores with a tenure of 10 years for renewable energy projects. In the same year, the Export-Import Bank of India (EXIM Bank), CLP Wind Farms, ReNew Power Ventures, and IDBI Bank all issued Green Bonds in the country. In 2021, more than $6.11 billion was raised through green bonds by more than a dozen companies, which is the highest since its inception in 2015.
Exponential Expansion of ESG & Sustainable Capital in India (2019–2021):
- UN-PRI Signatories: The number of Indian signatories in UN Principles for Responsible Investment (UN-PRI) tripled in 2020.
- ESG Mutual Funds: Rose to 10 ESG mutual funds in 2021, up from only two ESG mutual funds in 2019.
- Carbon Disclosures: Approximately 220 Indian companies actively disclose emissions reports through the Carbon Disclosure Project (CDP).
- ESG Fund Inflows: Surged 76% from Rs. 2,094 crores in 2019-20 to Rs. 3,686 crores in 2020-21 (Economic Times, 2021).
- Assets Under Management (AUM): Total AUM of ESG funds reached Rs. 12,320 crores as of November 2021, expanding 4.7 times from November 2019.
- Market Projection: CRISIL (2021) projects ESG assets in India to rise at least 15% annually to reach $60 billion by 2025.
- Domestic ESG Rating Pioneers: Acuité launched ESG Risk AI in January 2021 assessing the top 1,000 companies; CRISIL launched comprehensive ESG scores for 225 companies across 8 sectors in June 2021.
5. Critical Considerations for Green Bond Issuers & Verification
Green bonds significantly differ from other forms of bonds, as they are specifically created to meet the requirements of environment-friendly projects (Bhutta et al., 2022). The bond issuer raises a fixed sum from investors over a specified period of time, returns the investment when the bond matures and pays a set amount of interest (coupons) along the way. Issuers must evaluate three structural parameters (Bhutta et al., 2022; Park, 2019):
a. Labelling Decision (Costs vs. Investor Access)
Provides access to a wider range of global ESG investors and improves corporate reputation. However, operating costs are higher than conventional bonds due to upfront criteria design, ongoing monitoring, reporting tracking, and the risk of penalties for green defaults.
b. Selection of Green Criteria
Must align transparently with Green Bond Principles (GBP), Climate Bond Standards, and SEBI (2017) project definitions. Alignment with investor expectations (credit rating, environmental objective, pricing, and overall business ethics) is imperative.
c. Post-Issuance Periodic Reporting
Issuers must report on environmental and social value generated at least once a year during the bond life, incorporating data collection mechanisms and Key Performance Indicators (KPIs) to track sustainability milestones.
External Assessment & Assurance Mechanisms:
Second-Party Consultation (“Second Opinion”)
An environmental expert provides an assessment of the green credentials and project selection criteria proposed by the issuer prior to issuance.
External Third-Party Assurance (ISAE 3000)
Performed by audit professionals under International Standard on Assurance Engagement (ISAE) 3000 (revised 2013 by IAASB). Third-party assurance verifies fund allocation, prevents fund diversion, and solidifies institutional investor trust.
Mitigating “Greenwashing” Risks:
Greenwashing accusations emerge when core operations are unsustainable, proceeds are diverted to non-green assets, or tracking is deficient. Issuers avoid reputational damage through transparent reporting, rigorous metric tracking, and mandatory third-party assurance.
6. Recommendations for Stakeholders & Crucial Role of Chartered Accountants
Defines categories, disclosure standards, and mandatory offer document reporting.
Ring-fence proceeds strictly for declared green purposes and publish annual utilization audits.
Channel capital into accredited green debt instruments with robust third-party verification.
Provide objective ISAE 3000 assurance validating impact metrics and fund deployment.
The Professional Role of Chartered Accountants:
Chartered Accountants play a crucial role in ensuring compliance with laws and regulations. The auditors of the report are required to gather pertinent and appropriate audit evidence concerning compliance with laws and regulations that are known to directly affect the material amount and disclosures in reporting.
Chartered Accountants audit these reports related to green bonds to determine whether the information provided by the green bonds’ issuers is accurate. They verify the internal tracking approach of the issuer and disbursement of funds from green bonds proceeds to the project. They assist the entity in achieving its sustainability objectives and integrating it with business strategy and decision making. An External auditor’s assessment improves the reliability of the report and increases the investors’ confidence.
7. Concluding Remarks: CoP 26 Glasgow Pledges & National Trajectory
In recent years, sustainability and climate change have become significant global challenges. India is among one of the fastest developing economies; therefore, its efforts towards sustainability and climate change are going to have a major impact on the world’s sustainable development.
At the 26th Conference of Parties (CoP 26) in Glasgow, the Prime Minister of India pledged:
- Achieve net-zero emission by 2070;
- Reduce carbon emissions by one billion tonnes by 2030;
- Increase renewable energy’s share of the energy mix to 50%; and
- Proclaimed LIFE – “Lifestyle for Environment” as a watchword for sustainable development.
Around 56 Indian companies have already set targets for net-zero emissions by the beginning of the 2030s. The Finance Minister’s announcement for the issuance of sovereign green bonds represents a landmark stride toward attaining these net-zero targets and bolstering India’s ESG investment landscape. ■■■