A green sovereign bond issue from India is expected to resonate with global investors with large pools of capital dedicated to green causes, even though it will be an onshore rupee-denominated bond. However, the effect of a sovereign green bond goes far beyond raising funds at competitive rates or diversifying funding sources. It demonstrates the country’s commitment to decarbonization and other climate goals.
Sovereign issuers can serve as models for other types of issuers and contribute to the development of the green finance market. There is already a precedent in India, with public companies being the first issuers of green bonds. These issuances have catalyzed the growth of green issuance in India to nearly $10 billion (including green bonds and other labeled bonds) in 2021.
Green sovereign issues also bring additional collateral benefits. These include enhanced collaboration with different stakeholder groups and increased transparency of public spending for investors and citizens.
What can we learn from other sovereign green issues?
According to a survey of nineteen sovereign issuers of green, social and sustainability (GSS) bonds (eight developed markets and eleven emerging markets) conducted by the Climate Bonds Initiative, on average, 44% of GSS bonds were allocated to investors green, and at least eleven issuers favored investors describing themselves as green or socially responsible. In terms of reasons for issuing, climate change and local GSS market growth ranked highest in both developed and emerging markets, but there were differences. Developed markets valued investor demand as a reason significantly higher than their emerging counterparts, while emerging markets valued better prices and higher reputational benefits.
In terms of price, of the 23 GSS sovereign bonds issued by the 19 issuers, nine bonds had a greenium (yield lower than the existing yield curve), ten had a similar price and four bonds had a higher yield.
Finally, GSS sovereign bonds often fund spending from current or past budgets, not newly created projects. Expenses generally fell into three categories – tangible, intangible or combined. Tangible expenses include everything from renewable energy projects, energy investments in public buildings, or water conservation projects. Intangible expenditures included incentives to promote public transport, training programs to increase technical knowledge, or research programs on biodiversity or marine conservation.
What happens afterwards?
There is no shortage of current government projects that could be refinanced. These include rail electrification, metro fiber optic infrastructure, support facilities for wind and solar power plants, and assets needed to create adaptation like the National Adaptation Fund.
Currently, utility-scale renewables are attracting the bulk of green investment. The market has a strong national project finance ecosystem. Since the mid-2010s, as grid-connected renewable energy projects have grown and local commercial capital has replaced multilateral lenders like the IFC, shifting the funding landscape. With growing convenience, interest rates have come down significantly and India has become a destination for price discovery of grid-connected renewables. These assets have often been refinanced with bonds in offshore markets.
However, investment in other segments has been sparse for various reasons, including the nascent stage of the industry and the lack of strong political support. The green sovereign bond can signal that political support is in the anvil and attract interest from private investors beyond grid-connected renewables. Hopefully, all of this will accelerate the transition to a green economy.
Finally, the practical details must be settled. For example, what is the optimal size of issuance, which assets can be tagged, and the issuance modality (use existing auction systems or explore alternatives).
Achieving the goals set out in CoP26 requires not just greening a few sectors, but transitioning the entire Indian economy to a path consistent with zero carbon by 2070. The Sovereign Green Bond Market is essential to facilitate such a transition. .
(By Sandeep Bhattacharya, Head of India Projects at Climate Bonds Initiative and Sivananth Ramachandran, CFA, CIPM, Director of Capital Markets Policy, India at CFA Institute. Opinions are those of the authors)