The launch of sovereign green bonds has gone off well, with more than 50 investors participating in the issuance. The 10-year bond was priced at a coupon of 7.29%, six basis points lower than the yields on papers of comparable maturity, while the five-year paper commanded a ‘greenium’ of 5 basis points. Typically, greeniums tend to be bigger, but this is a beginning. The pricing should serve as a reference for private sector companies looking to raise rupee debt related to the environment, social, and governance (ESG). From the government’s point of view, Rs 8,000 crore in the kitty is good going, and the current year’s target of Rs 16,000 crore should be easily achieved. In the years ahead, however, it would need to raise significantly bigger sums to meet its green commitments.
For that to happen, the investors subscribing to the bonds must be convinced there is no green-washing and that the funds are, indeed, being used to support green projects. There has not been much transparency in the use of funds that are collected for specific purposes—for instance, a cess for education. But the framework that has been put in place to track the use of the funds raised through green bonds is fairly comprehensive. To begin with, the funds will be deposited in the Consolidated Fund of India, and a separate account will be maintained by the finance ministry. A ‘Green Register’ or an information system with all details relating to bond issuances, funds collected and allocations made will be maintained.
A Green Finance Working Committee (GFWC) will make sure that the process is being followed and that the deserving projects get the investments. It will monitor the execution and turn out reports regularly to document the progress of projects. The funds will be released in tranches as physical targets are achieved. To make the process credible, the government has decided to rope in an external third-party reviewer to provide an annual assessment of the allocation. All this and more would be required to keep investors satisfied.
The government is also clear about what it will not finance. For instance, nuclear power generation, direct waste incineration, and biomass power plants that source the biomass from protected areas or landfill projects won’t be funded. Again, hydropower projects, which are a renewable source of energy, won’t be funded if they are bigger than 25MW, as they are seen to have endangered the environment. In fact, subsidies or incentives for private transportation using compressed natural gas (CNG) are excluded, as are coal power plants that want to boost their energy efficiency levels.
Meanwhile, banks, too, must step up lending to the renewable energy sector. As Rajeshwar Rao, Deputy Governor, the Reserve Bank of India, observed recently, structural changes may be called for in the traditional lending approach, including evaluating and certifying green credentials of projects. Rao also highlighted the challenges in scaling up green finance, especially the presence of a robust ecosystem for third-party verification and impact assessment. Indeed, it is important to address green-washing concerns to ensure the flow of capital to green projects. India has done exceedingly well to increase the share of non-fossil fuel-based energy resources to 40% of installed electric power capacity. The objective should be to achieve the next set of targets—500GW of non-fossil capacity by 2030, for example—at lower investment costs through enablers like green bonds.