Green

Bonds in Sustainable Finance: Exploring the Case of

India

Sanjana Manaktala, India

Abstract: To address global climate change, sustainable financing should play a central role in
driving change. Of the sustainable finance instuments, green bonds are the furthest developed
and most widespread. In this context, this paper seeks to explore the case study of India,
examining, through a timeline analysis, some major milestones for the growth of green bonds in
India. These include the first green bond issued in 2015, the release of green bonds guidelines by
the Securities and Exchange Board of India in 2017, and the launch of a green bonds trading
platform in 2019. It lays out a few challenges faced by the market, such as an under-developed
bond market, the risk of “green-washing” and regulatory issues. It then recommends the
development of a national strategy on developing capital markets for sustainability, institutional
strengthening, regulatory reform, and new areas for scope expansion, such as municipal bonds,
retail participation and Non-Resident Indian populations. The case can help shed light on
approaches to building climate resilience and deep decarbonisation in developing economies.
Keywords: sustainable finance, India, green bonds, climate change, SDGs, governance reform

1. Green Bonds as a Driver of Sustainable Finance

To meet the challenges of climate change, the OECD estimates $93 trillion will be required in green
infrastructure investment over the next fifteen years (OECD, 2015), while UNEP estimates adaptation
costs reaching between $280 billion and $500 billion by 20501 (UNEP, 2018). Innovative mechanisms of
mobilizing and monitoring private green finance are necessary to bridge this gap, as Figure 1 shows.

1 As it is by now well established that global financial systems must play an important role in facilitating the green
transition and deep decarbonisation of economies around the world.

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Figure 1 Requirements of a Green Economy (United Nations Environment Programme, 2014)

There is a growing range of financial instruments emerging to support environmentally sustainable

activities2, aimed at meeting the requirements of investors while improving risk assessment and
adaptation (Park, 2018). Prime among these are green bonds, a form of fixed-income debt financing
that function largely like established bonds, with the exception that the proceeds are dedicated to
financing “green” projects, assets or business entities, such as renewable energy, waste management,
sustainable transport, water, land-use etc. (Park, 2018).3 Though the US$ 200 billion green bonds
market (Fatin, 2019) is still a small fraction of the nearly US$100 trillion global debt markets, it is an
indicator of the direction in which financial systems are moving.

Allocation of proceeds across sectors in 2019 is given by Figure 2, and issuance by country is given by
Figure 3 (Fatin, 2019). In this estimation, India is at 14th place, with around US$ 4 billion, while other
estimates have pegged the Indian market at US$ 7 billion, placing it 8th in the world (Sreenivasan,
2018).

2 The 2015 Paris Agreement on Climate Change makes it clear that the funding required to address transition risks cannot

be mobilized by governments alone, and that the private sector financing will be crucial in addressing the existential
threat posed by climate change.
3 This similarity to existing instruments, combined with the relatively simple principle of green labelling (for use of

proceeds) has led to relatively lower barriers to entry, contributing to making green bonds the most well developed
form of green financing thus far.

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Figure 2 Allocation of Proceeds of Green Bond Funding of US$ 202.2 bn at October 2019 (Fatin, 2019)

Figure 3 Green Bond Issuance by Country in USD bn in 2019 (Fatin, 2019)

2. A Case Study of India

Given India’s population (1.3 billion), geographical size (3.287 million km²), coastline length (7,516.6
km) and vulnerability to climate change (fifth most vulnerable of 181 countries according to the Global
Climate Risk Index 2020), greening the financial system and adequately accounting for risk is vital.4 The
environment ministry has estimated that India will need $2.5 trillion to meet its Nationally Determined

4 India is already experiencing record-breaking extreme temperatures, erratic and declining monsoon rainfall,
overexploitation of groundwater resources, retreating Himalayan glaciers, major floods and consumption pressures
on natural resources.

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Contributions, of which $280 billion is needed in the next five years for green infrastructure alone
(Agrawal, 2019). Further, channelling capital into more sustainable assets will also help financial
institutions to appropriately manage risk, improving the resilience of the entire financial system. Green
bonds are a means towards these ends. This paper briefly considers the context and performance of
green bonds in India, and attempts to offer some insights for the way forward.

2.1. India’s Bond Markets

India’s debt market is dominated by sovereign debt5 at close to 80%, with corporate bonds playing a
much smaller role at around 20%. Market depth as indicated by the ratio of the accumulated value of
outstanding bonds as a percentage of GDP suggests a middling performance at 16% at the end of March
2018, higher than that of Japan at 14% of GDP, Philippines (6.9%), and Indonesia (2.9%), but far below
the US at over 120% and China at about 19% (CARE Ratings, 2018). However, mobilisation of capital
through the issue of corporate bonds has only recently reached 4.4 per cent of the GDP. Though this is
higher than the 0.2 per cent of GDP for mobilisation through new equity issues, it is significantly less
than most similarly placed emerging markets, which vary from 15 to 50 per cent (Chandrashekar &
Ghosh, 2019). Within the corporate bond market, the demand is mostly confined to institutional
investors with retail investors accounting for only 3 per cent of the outstanding issuances (RBI, 2019).
This suggests that bonds are still largely driven by regulation. Simultaneously, the challenges of non-
performing assets, debt default by non-banking financial companies, skewed distribution of
outstanding debt securities towards financial corporations etc. have led to a tightening of credit flows
and general malaise in the Indian economy, therefore limiting the growth of green bonds as well
(Chandrashekar & Ghosh, 2019).

2.2. Milestones for Green Bonds in India

Though the Reserve Bank of India first issued guidelines on non-financial disclosures regarding
Corporate Social Responsibility and sustainability in 2007, green bonds took off in India only in 2015.
Subsequently, development has been rapid, with Green Bond Regulations released by the Securities and
Exchange Board of India (SEBI) in 2017, followed by the launch of a dedicated trading exchange for
green bonds in 2019. The growth of the Indian green bonds market until 2017 is given by the figure
below, but clear data for the issuance value and allocation of proceeds is not easily available.

5 Including government securities, State Development Loans, Treasury Bills, certificates of deposit and commercial papers.

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Figure 4 India's Green Bond Issuance by Year

2.2.1. The First Green Bond - 2015

Yes Bank became the first Indian bank to issue Green Infrastructure Bonds (GIBs) on the London Stock
Exchange (LSE), worth Rs. 10 billion (US$ 160 million) to fund 5 GW of renewable energy projects (Yes
Bank, 2018). Since then, multiple renewable energy firms6 and banks7 have issued close to 25 green
bonds on the LSE. Indian alternative-energy firms alone have sold about $3.4 billion of foreign-currency
notes in 2019, up from 0 in 2018 (Joshi, 2019). It is thus clear that out of the six forms of green bonds
defined by the OECD,8 corporate and project bonds are the fastest growing in India (OECD, 2015).

2.2.2. SEBI Guidelines - 2017

A second major milestone was SEBI’s 2017 guidelines for the issuance and listing of green bonds,
requiring issuers to make disclosures regarding use of proceeds; evaluation and selection of eligible
projects; management of proceeds; and reporting (Securities and Exchange Board of India, 2017). It
defines green projects and assets eligible for funding very broadly9, and provides for the option of
independent third party reviewer or certifier to consider project evaluation and selection criteria,
project categories etc. Further, after the upfront disclosures in the offer documents, continuous

6 Such as Azure, NTPC, Greenko and Renew Power.

7 Such as Yes Bank, EXIM, L&T Finance, Axis, IDBI and REC.
8 Corporate bonds; project bonds; asset-backed securities (ABS); supranational, sub-sovereign and agency (SSA) bonds;

municipal bonds; and financial sector bonds

9 Including renewable energy, clean transport, water management, climate change adaptation, energy efficiency, waste

management, sustainable land use and biodiversity conservation

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disclosure requirements are defined for half-yearly and annual financial results announcements, that
include utilisation of proceeds according to internal tracking mechanisms and the details of unutilised
proceeds. With the annual report, details of the projects funded, qualitative and quantitative
performance measures of the environmental impact and methods of their preparation must be
disclosed (Securities and Exchange Board of India, 2017).

The impact of these regulations can be seen in the fact that the very first green bond issued by Yes Bank
has an impact assessment report publicly available. Through the report, it appears that the SEBI
guidelines have been put into practice, facilitating public disclosure of the fact that the bond resulted in
installation of 1.1 GW rather than 5 GW of renewable energy as initially targeted (Yes Bank, 2018). The
report also contains a statement of independent verification by KPMG Services, and an outline of the
Green Bond Principles, the leading international standard for “voluntary process guidelines that
recommend transparency and disclosure, and promote integrity in the development of the green bond
market” (Yes Bank, 2018). This suggests that the reputational advantages of green bonds form an
incentive for issuers, as they showcase going above and beyond basic regulatory requirements.

2.2.3. Green Bonds Trading Platform - 2019

In June 2019, India’s first international exchange, imaginatively titled the India International Exchange
(INX), owned by BSE, launched a dedicated platform called GSM (Global Securities Market) – Green, for
trading in green bonds (Press Trust of India, 2019). Five issuers have eight issuances worth US$ 4.1
billion listed on the website of the exchange as of December 2019. This has grown from three issuers
worth US$ 500 million at the time of its launch (India International Exhange, 2019), a growth rate of
720% in a matter of months.

2.3. Challenges

Despite the evidence for green bonds as a fast-growing and fast-evolving sector, there remain concerns
that it is simply not evolving fast enough to meet the challenges of India’s development.

The illiquidity of the corporate bonds markets and lack of expansion into other types of green bonds
remains a bottleneck. Further, the market remains quite small in size, with a multiplicity of
stakeholders, standards and processes. At the same time there are a limited number of issuers, the cost
of debt remains high, and green investments are still considered to be risky novelties.

The literature suggests further that risk of “greenwashing”, i.e. “profit or brand-enhancing
environmental rhetoric despite neutral or even negative corporate social responsibility or
environment, sustainability and governance commitments” is high. Park argues that greenwashing
could lead to a systemic deficit in legitimacy for the regulatory fabric of the green bonds and sustainable

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finance at large. Existing regulatory systems combine public and private regulation, but these remain
both fragmented and fragile (Park, 2018).

2.4. Recommendations

1. National Strategy: A national strategy on developing capital markets for sustainability would
give fillip to green bonds, municipal bonds, green IPOs etc. (FICCI-UNEP, 2016). It would allow
for coordination among policymakers, regulators, institutional investors, and consumers, while
spreading awareness, understanding, and availability of green investment options over brown
alternatives. To do this, it should consider a hybrid model that weds the responsiveness of
voluntary private regulatory regimes with the legitimacy of public regulation (Park, 2018).
2. Institutional strengthening: Key financial institutions supporting decarbonisation and climate
resilience should be strengthened, and the conversion of development finance institutions into
commercial banks should be reconsidered (Chandrashekar & Ghosh, 2019), in order to fill the
gap created by absent long-term financing at reasonable interest rates.
3. Regulatory reform:
a. Pension funds, insurance companies, and retail investors, who are currently prohibited
from investing in private debt, should face looser regulation and may even be given time
bound incentives to invest a certain percentage of their fixed income portfolio in green
bonds (Agrawal, 2019; Bahuguna, 2016). This would open up an enormous market,
particularly for clean energy.
b. The government can consider credit enhancement and guarantees to help hedge the
perceived risks and enhance the overall credit rating of green bonds. Future allocations
of tax-free bonds with a larger share for clean energy could further help diversify and
deepen the debt markets in India (Bahuguna, 2016).
4. Scope expansion:
a. Four types of green bonds identified by OECD10 have not yet found a foothold in India.
Municipal bonds in particular can help finance transport infrastructure11 to be built by
severely under-funded Urban Local Bodies in India. They have been highlighted as an
important factor for cities in UN-Habitat’s New Urban Agenda.
b. Green bonds can be opened up for retail participation. Establishment of an accurate and
reliable rating and certification system to identify financial risks and environmental
impact would empower investors to successfully differentiate between “green” and
“brown” assets (Agrawal, 2019). This would allow the financial system to respond to the

10 ABS, SSA, municipal bonds and financial sector bonds.

11 Such as bus stops, improved pedestrian walk-ways, cycling tracks etc. and promotion of non-motorised transport for

last-mile connectivity.

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 growing eco-awareness of high-income segments of the Indian population, while also
reducing the cost of finance for green infrastructure.
c. Non-resident Indians represent a relatively under-targeted segment, and easing of
foreign portfolio investment and repatriation policies for green finance could help
channel a large pool of capital through remittances etc. from interested retail investors
into the clean technology and green bond space (Agrawal, 2019).

3. Conclusion

Green bond markets, though growing fast, are still significantly narrow in their impact on climate
resilience and deep decarbonisation in developing economies, as the study of India shows. There are a
number of fast-paced promising developments, but a concerted and coordinated effort to mobilize
sustainable finance, including but not limited to green bonds, is necessary to be able to respond to the
threat of climate change.

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