India’s Green Bonds framework comes with a lot of promise, but also grey areas

The framework for India’s sovereign green bonds, which aims to spur investments in clean technologies while minimising risks for investors, addresses the difficulty of raising capital but might be introducing new problems in doing so

India released the framework for its Sovereign Green Bonds scheme last month. The objective of the scheme, announced first by finance minister Nirmala Sitharaman in the 2022 budget speech, is to fund public sector projects with climate action merits. The scheme has been hailed as a “commendable step”, but comes with caveats. 

The framework not only includes CNG-based public transport as a “green” project, there is a wide range of projects that are listed as eligible for green loans, but it is not as easy to establish their green credentials. But does the framework include robust project selection and verification processes that have a basis in science and align with globally accepted practices, rather than being determined by financial institutions, bureaucracy and political interests?

The sovereign green bonds are expected to attract market investments (loans) to fund green projects, on low interest rates termed as “greeniums”. The move is seen as “solidifying” India’s commitment towards its Nationally Determined Contributions (NDC) targets and building “credibility” with global climate investors. 

Interdisciplinary environmental research agency run out of Oslo, the Center for International Climate Research (CICERO), analysed India’s green bond framework and certified it as being aligned with the International Capital Market Association (ICMA) Green Bond Principles (2021). The framework allows payments of principal and interest on bonds without subject to the performance of the projects. In short, investors do not bear any project-related risks as opposed to standard bonds where principal and interest is repaid at maturity. The risks are borne by the government, since de-risking is a prerequisite to drive green investments from capital markets. 

How the bonds work

The Reserve Bank of India (RBI), which oversees the country’s debt, is preparing to sell its first ever batch of sovereign green bonds as early as this month. Private firms can buy the certified green bonds and receive periodic interest on these bonds. What the government earns from the selected projects is slated to help pay back the principal amounts of the bonds along with interest.

The government aims to issue bonds worth Rs. 16,000 crore ($1.94 billion). The framework defines a ‘green project’ as that which encourages energy efficiency, reduces carbon emissions and greenhouse gases, promotes climate resilience and/or adaptation and values and improves natural ecosystems and biodiversity, according to sustainable development goals (SDG) principles. A green finance working committee headed by chief economic adviser V Anantha Nageswaran will select government projects for green financing. Nageswaran, in an interview to ET recently, said India is witnessing the revival of private capital expenditure. Comparatively, there is no paucity of finance for fossil fuels. Coal mines have been opened to private companies with a single-window clearance for commercial mining. India has decided to invest Rs.400,000 crore in the coal sector in the coming decade.

Box: What projects are eligible for green financing? 

– Solar, wind, biomass, hydropower energy projects with storage 

– Energy saving installations in government buildings, LEDs to improve public lighting, new low-carbon buildings as well as energy-efficiency retrofits to existing buildings. 

– Projects to reduce electricity grid losses

– Projects of climate observation and early warning systems 

– EVs in public transportation, subsidies for electric vehicles, including building charging infrastructure  

– Environmentally sustainable management of agriculture, animal husbandry, fishery and aquaculture, forestry management, including afforestation/reforestation, certified organic farming projects, coastal and marine environment projects, biodiversity preservation, including conservation of endangered species, habitats and ecosystems.

Bonds framework ‘good’ but it comes with pitfalls 

CICERO found the framework to be good, but not without pitfalls. It found that while the framework stated that exposure to physical climate change risks will be considered by the Green Finance Working Committee (GFWC), it has not indicated specifically how this cross-cutting consideration will be implemented. What specific climate-resilience screening criteria will be used in project selection has not been disclosed. 

CICERO’s shades of green report found some expenses include risks of locking in emissions, adding that “investors should be aware that there are lock-in risks associated with several projects, such as financing new buildings with fossil fuel heating or water heating, expenditures that could indirectly support the expansion of thermal coal power generation and expenditures to support natural-gas-based public transport. Expenditure on railway infrastructure, although electric, may allow for transporting larger amounts of industrial freight to heavily emitting industries, with overall emissions increasing.” 

The assessment report also noted that subsidies to support the expansion of renewable energy, such as wind and solar power, may be given to large power generation companies that are heavily involved in coal-based power generation. 

CNG labelled ‘green’

Just as the European Union included natural gas and nuclear energy in its taxonomy as sustainable sources of energy, India has allowed investments/expenditures on “a relatively cleaner Compressed Natural Gas (CNG)” as an ‘eligible expenditure’ when used in public transportation projects only. 

Subsidies for private transportation using CNG are neither envisaged nor included, the framework states. Analysts pointed out that in India, public transport includes buses and trains and even individual point-to-point options such as autos, taxis, and app-based Ola and Uber. The inclusion of CNG will keep the investors at bay, they warn. 

Shantanu Srivastava of IEEFA said green taxonomies should not be diluted with the inclusion of assets that can be labelled as non-green by some investors such as gas or nuclear energy, even if they were low on emission compared to oil or coal. If taxonomies do include low-emission transitional assets, then they should be labelled as such—brown taxonomy rather than ‘green’. Why would pension funds or private equity funds with mandates to invest in green assets invest in bonds that include non-green assets?

Projects that are not allowed include new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based, nuclear power generation, direct waste incineration, alcohol, weapons, tobacco, gaming, or palm oil industries, and renewable energy projects generating energy from biomass using feedstock originating from protected areas, landfill projects and hydropower plants larger than 25 MW.

The need for independent auditors

According to the framework, members of the GFWC will evaluate the projects for eligibility. According to the document, “climate specialists” from Niti Aayog will guide the GFWC on matters of environmental and social relevance as well as the representative from the Ministry of Environment, Forest and Climate Change. The finance ministry will oversee the process of evaluation, including the economic viability of projects. Ministries that are currently not part of GFWC will also be consulted for generating awareness towards sustainability and green projects within their purview, to identify new projects, the framework states. 

Srivastava said the framework does not include independent third-party audits of project selection process, management of proceeds and reporting on allocation and impact of the proceeds. “Sovereign issuers have complex information flows and decision-making structures to support their green bond transactions,” he writes, adding that clarity on the robustness of the process would be desirable for investors. 

There is little information on what happens to unassigned funds? The framework says: “Unallocated proceeds, if any, will be carried forward to next year for investment in eligible green projects only. It will be endeavoured that all proceeds are allocated within a span of two years from the date of issuance.”

The framework also lacks clarity on whether SGBs will refinance existing projects. Srivastava warned that corporates who have raised green bonds have overwhelmingly used them for refinancing operational projects. The framework does not clearly state if, and in what proportion the bond proceeds will be used for financing compared to refinancing.

Bonds can’t achieve what taxes can 

According to Rohit Azad, assistant professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, financing public sector projects through debt alone has its limitations. Bonds and loans allow polluters to use the money to diversify their brown businesses, thus failing to rein in greenwashing and emissions. What carbon tax can achieve, bonds cannot. 

For example, if big emitters from the private sector are taxed, the revenue generated can be used to fund technology and infrastructure to reduce their emissions, but the same cannot happen with green bonds, Azad added. “Global warming is not just a problem of the supply side alone, it is also an issue of demand [consumption] and large consumers should be taxed for their emission-intensive businesses and lifestyles to manage the demand side. Is that kind of emission control possible through bonds?” he asked.

Secondly, it’s common for fossil-fuel businesses to invest in green bonds, or own renewable energy companies. “Where is the taxation on the brown side of the same company? In fact, bonds allow them to diversify their portfolio, while taxation helps control the fossil fuel side of operations,” he added.

Either form of financing, bonds or taxes, are fine as long as the burden is not falling on the poor, or those least responsible for emissions. Arguing for taxation over bonds in the EU taxonomy, economist Thomas Piketty wrote that bonds radically shift the decision-making centre of economic policy towards the central bankers, and that high-ranking civil servants take decisions behind closed doors, which affect millions of European citizens.

Greeniums biased towards European investment firms?

According to a Bloomberg report, a 2022 Federal Reserve paper found that green bonds have a yield spread that is eight basis points lower on average compared to conventional bonds. But this so-called greenium in corporate bonds is biased toward investment-grade European firms rather than those with the best projects. Foreign investors can buy India’s green bonds through the Fully Accessible Route, the report said. 

Lastly, can green bonds, which are loans with fixed returns minus risks, be labelled as climate finance? Or is it more accurate to see them for what they are—debt instruments that allow private investors a slice of the decarbonisation pie. While there isn’t anything inherently wrong with this as far as instruments of debt go, the transfer of all liabilities onto the public is hardly compliant with the principle of fairness that ought to be a requisite characteristic of global climate finance.

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Moonis Ijlal

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