Green bonds have the potential to provide sustainable capital for climate change projects such as electric vehicles, mass rapid transport systems, water and irrigation management and renewable energy.

“While India has seen sustained investment in renewable energy over the last 8-10 years, which has resulted in accelerated growth for the sector, significant investments are still required. And the Indian economy requires massive long term, cost-effective financing for other green sectors, where green bonds could provide the much needed support,” according to Deepto Roy, Partner Project & Project Finance, Shardul Amarchand Mangaldas & Co.

In an exclusive interaction with BusinessLine , Deepto Roy explains how green bonds could make a difference by adoption of a national investment strategy aligned with a transition to low-carbon and climate-resilient development. Excerpts:

How do you see green bonds bridging funding requirements and making a difference?

Green bonds can help drive down cost of capital for sustainable projects, where the proceeds are exclusively utilised for financing climate change mitigation. Raised by corporates or by financial institutions for lending to renewable projects, they address the high cost of infrastructure funds and can help in ensuring better return on equity while driving down tariffs.

Infrastructure financing available in India typically suffers from asset-liability mismatches, where the project revenues do not necessarily track the repayment obligations of the financing. Bond refinancing can address this situation.

Bank debt has been a primary source of funding for the renewable sector. But banking funds are limited and subject to sectoral limitations and liquidity concerns for the financial institutions. For continuous growth bank funds need to be cycled effectively.

How has the green bond market evolved over the years? What are its prospects?

In 2015, Exim Bank and IDBI became the first Indian issuers of green bonds. They were followed by YES Bank and China Light & Power Wind Farms India. In 2016, NTPC, Axis Bank and PNB Housing Finance raised green bonds, the latter two for funding “green buildings”.

Later in 2017, IREDA and the Indian Railways Finance Corporation (IRFC) raised green bonds from the market. In the same year, the Securities & Exchange Board of India (SEBI) issued the “Disclosure Requirements for Issuance and Listing of green bonds”.

Also in 2017, Jain Irrigation raised one of the few non-renewable power specific green bonds. It was intended to finance water use infrastructure.

In 2018 the State Bank of India raised $650 million in certified climate bonds. In October 2019 India joined the International Platform of Sustainable Finance (IPSF) to scale up environmental friendly investments.

What are the challenges in deployment of green bonds in the country?

The development of the green bond market necessarily depends on the development and strengthening of the general corporate bond market. India’s sovereign credit rating of BAA2 means that many green bonds need credit enhancement to attract international investors. Multilateral development banks such as the International Finance Corporation (IFC) and the Agence Francaise re Development (AFD) have credit enhancement support in the past and they would continue to play an important role.

The renewable sector is also facing a number of challenges, which make financing green bonds challenging such as rapidly falling tariffs, delays in execution of power purchase agreements after signing of bids and cancellation of tenders post issuance of letters of allotment.

There is worldwide increases in the price of modules and other solar plant components and additional expenditure on account of the imposition of Basic Customs Duty (BCD) from April 2022 and potential delays in claiming contractual relief.

So what is the way forward for the Green Bond market?

India has became the second largest green bond market among developing countries in 2020, but the size of the market is one-tenth that of China. An RBI study on green bonds show that the cost of raising green bonds have remained higher than other bonds; and green bonds constituted only 0.7 per cent of the bonds issued in India since 2016. Clearly there is a long way to go for the Green Bond market, although over subscription of the offerings that have happened seem to indicate that significant appetite exists in the market.

The size and the penetration of the Green Bond market can go up with the encouragement of more robust foreign exchange risk management mechanisms. This will make Indian green bonds more attractive. Further, there is a need for mechanisms for a rupee denominated bond market which can be accessed by international investors.

And there is a need to create tools and certification methods for green tagging sustainable projects on the books of financial institutions and governments and building project pipelines that can underlie future green bond issuances.