Green bonds, which finance environmentally friendly businesses and assets, have emerged as one of the key financing mechanisms driving the global economy’s transition to a greener future. Since the issuance of the first green bond in 2007 by two multilateral development banks (World Bank and European Investment Bank), the green bond market has grown exponentially and is currently pegged at over $180 billion in cumulative issuance. Penetrating markets across developed and emerging economies, green bonds have seen extensive participation from corporates and financial institutions, including sovereign and municipal bodies.
A groundbreaking year for green bonds was 2015. Global markets witnessed currency green bonds and innovative structuring along with maiden green bond issuance in a number of countries. The green bond market was further strengthened with issuance doubling to $81 billion in 2016 from $42 billion in 2015. Supported by market-driven state policies and marked by a rapid growth in green bond issuance in India and China, the Asian market has emerged as a frontrunner in the green bonds space.
Contributing to sustainable growth
India’s green bond market has witnessed a number of critical milestones following Yes Bank’s and India’s first green infrastructure bonds issued in February 2015. A growing number of corporates and financial institutions have leveraged this innovative mechanism to raise capital, attracting foreign investments and inducing momentum in the market.
India also witnessed its award-winning first green masala bond (rupee-denominated bond), with the International Financial Corporation raising an off-shore rupee bond on London Stock Exchange for investing in Yes Bank’s green bond, demonstrating how innovations in emerging markets have the potential to capture global attention.
Green bond issuance in the country witnessed a 30 per cent year-on-year increase in 2016, cumulatively amounting to about Rs.18,131 crore (equivalent to $2.7 billion) and making India the seventh largest green bond market globally.
These green bonds have been crucial in increasing financing to sunrise sectors like renewable energy, thus contributing to India’s sustainable growth.
The Climate Bond Initiative, in its India update, indicated that about 62 per cent of the green bond proceeds have been allocated to renewable energy projects, followed by the low carbon transport sector and low carbon buildings accounting for 17.5 per cent and 14 per cent of the proceeds, respectively. At 2.2 per cent for each, the allocation of green bond proceeds towards water management and waste management has been somewhat limited owing to perceived sector-specific issues as well as due to projects being smaller in size and geographically dispersed.
Indian regulators have shown exemplary foresight in recognising green bonds as a key tool towards financing the nation’s climate change targets and in guiding the development of the green bond market through necessary policies and reforms.
In January 2016, the Securities and Exchange Board (SEBI) of India published its official green bond guidelines and requirements for Indian issuers, placing India amongst a select set of pioneering countries who have developed national level guidelines.
In addition to SEBI’s guidance on green bonds, the Reserve Bank of India passed regulatory reforms aimed at strengthening and expanding India’s corporate bond market. The extent of partial credit enhancement provided by banks has been increased to 50 per cent from 20 per cent of the bond issue size, while also permitting banks to issue masala bonds — key moves that will bolster the Indian green bond market.
Expectations from 2017 and beyond
The full potential of India’s green bond market remains untapped, with only a limited number of issuers so far. With increasing interest from the government and market regulators, 2017 is expected to see further developments in terms of innovations and supporting policy and regulatory frameworks aimed at bringing more clarity and impetus to the space.
Further to the interpretation indicated in SEBI’s green bond guidelines on what classifies as ‘green’, there is a need for developing a formal definition of ‘green’ to ensure understanding across sectors. A more descriptive and exhaustive classification from Indian regulators and policymakers in the coming years would be crucial in expanding the green bond market further.
Following global trends, the upcoming year is poised to witness the first ‘blue bond’ issuance (bonds used to specifically finance water infrastructure) in India. Globally blue bond issuances have crossed $10 billion, with India yet to enter the market. Given the rising financing gap in India’s water sector, it is imperative to utilise such innovative mechanisms for water infrastructure augmentation as well.
While credit enhancement has given an impetus to green bonds and will remain crucial, there is a scope for other innovative mechanisms such as securitisation. Many standalone green projects such as roof top solar, energy efficiency and rural water supply still remain unattractive to institutional investors owing to the smaller scale and vast geographical spread. Aggregation and securitisation of such projects could be a welcome move in providing mainstream debt to small-scale green projects.
The recent drive by the Prime Minister to resuscitate the municipal bond market for water supply projects in cities such as Pune and Hyderabad is highly commendable. The Indian government’s ambitious push for smart cities has opened emerging points that may be suitable for private sector participation and may soon culminate into India’s first green muni bond.
With an eventful year gone by, especially the formalisation of the Paris accord at the COP22, 2017 promises to deliver on some of the commitments undertaken globally for green financing.
With developed countries reaffirming their $100 billion mobilisation goal per year by 2020 to support climate action in emerging nations, utilisation of green bonds as an effective vehicle to tap into climate funds is anticipated to grow. Collective participation of regulators, policymakers, corporate and financial institutions is going to be crucial in pushing frontiers of green bonds further, unleashing new opportunities in addressing climate change.(Question in Prelims 2016)
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.