UNLOCKING THE GREEN BOND

POTENTIAL IN INDIA
A Study of the SEBI Guidelines

CORPORATE FINANCE
INSTRUCTOR: MS. RASHMI PATOWARY
Abhipriy Burman | Umang Pathak | Aditya Mahajan
ABSTRACT

This paper aims to discuss the various economic and environmental impacts of green
bonds and the avenues for expanding investing activities and overall funding with respect to such
bonds. It is important to note that green bonds are no different than any other corporate bond, but
are used for financing green projects, i.e. projects geared toward minimizing/solving
environmental degradation. There is a correlation with the usage of the funds accumulated from
issuance of green bonds and the political, socio-economical activities of the countries. This paper
aims to deal with the regulatory aspect of the green bonds, the transparency, the socioeconomical
radar and the hidden potential in the Indian financial market. Furthermore, the political scenario
of the climate change committees with the issuance of the green bonds, the agreement and such
are the most important criteria to determine the psyche of the investors while dealing with them,
and the obvious, moral and profitable venture for the issuer in utilizing the funds for
environmental projects. Therefore, before analyzing the functioning, circulation, etc. of these
bonds in the financial market it is imperative to understand the environmental problems these
bonds are designed to curb; both on the global and the national scale.

CLIMATE CHANGE: AN OVERVIEW

Climate Change is a change in the statistical properties of the climate system when
considered over a long period of time, regardless of the cause. The term specifically refers to the
anthropogenic global warming, which is caused by human activities, as opposed to the natural
environmental processes. This term was proposed by World Meteorological Organization
(WMO) in 1966to encompass all forms of climatic variabilities on a time scale longer than 10
years, regardless of the cause.1 The Intergovernmental Panel on Climate Change (IPCC), which
includes more than 1,300 scientists from the United States and other countries, forecasts a
temperature rise of 2.5 to 10 degrees Fahrenheit over the next century.2

1
HULME, MIKE (2016). CONCEPT OF CLIMATE CHANGE, IN: THE INTERNATIONAL ENCYCLOPEDIA OF GEOGRAPHY.
WILEY-BLACKWELL/ASSOCIATION OF AMERICAN GEOGRAPHERS (AAG).
2
'GLOBAL CLIMATE CHANGE: EFFECTS' (CLIMATE CHANGE: VITAL SIGNS OF THE PLANET, 2019)
<HTTPS://CLIMATE.NASA.GOV/EFFECTS/> ACCESSED 15 APRIL 2019.
 Greenhouse gas emissions, such as carbon dioxide, methane and nitrous oxide, contribute
to global warming and climate change. According to the US-based 'think tank' the World
Resources Institute, India was responsible for over four per cent of total emissions in 2000 —
making the country the sixth largest emitter in the world. Emissions are set to rise further still
over the next 20 years as the Indian economy rapidly develops. Both the International Energy
Agency and the government of the United States' Energy Information Administration predict
over 90 per cent growth in carbon dioxide emissions alone by 2025.3 The following table shows
India’s greenhouse emission in comparison to other countries:-

INDIA’S TAKE ON CLIMATE CHANGE

3
CLIMATE ANALYSIS INDICATORS TOOL VERSION 3.0. WORLD RESOURCES INSTITUTE, WASHINGTON, DC, UNITED
STATES (2006)
 A 2015 Bloomberg report estimates that keeping the world below the 2-degree
Celsius scenario, a threshold viewed as limiting the probability of devastating
consequences will require USD 12 trillion over the next 25 years. 4 Official Indian
government estimates state that India will require USD 2.5 trillion to meet its climate
actions between now and 2030 5. To tackle the progressive dangers of climate change,
Indian government took cognizance of all the issues pertained in the G20 summit a nd the
Paris agreement within the United Nations Framework Convention on Climate Change
(UNFCCC), and decided upon a National action plan on Climate Change (NAPCC). This
document, published by the Prime Minister’s council, guided by the following principles,
(i) protecting the poor and vulnerable sections of society through an inclusive and sustainable
development strategy, sensitive to climate change; (ii) achieving national growth through
ecological sustainability; (iii) devising efficient and cost-effective strategies for end use Demand
Side Management; (iv) deploying appropriate technologies for both adaptation and mitigation of
greenhouse gases emissions; (v) engineering new and innovative forms of market, regulatory and
voluntary mechanisms to promote sustainable development; (vi) effecting implementation of
programmes by including civil society and local government institutions and through public-
private partnership; and (vii) welcoming international cooperation for research, development,
sharing and transfer of technologies.6

For the commencement of such principles and action plans mentioned under the
document, government would require USD 2.5 trillion as stated in the preceding passage. To
meet the requirements of such a huge amount of lump sum funds, the government would require
massive amount of carbon tax, which is too far fetched as a dream considering the developing
economy and the money supply in the country. Therefore, the financial bond market becomes a
central factor to meet the obligations of the government in reference to the climate change.

4
BLOOMBERG, 'THE CLEAN ENERGY COUNTRY COMPETITIVENESS INDEX' (2015)
<HTTPS://BNEF.COM/INSIGHTDOWNLOAD/13293/PDF/>

5
“UNFCC Report” (NDC Registry) <http://www4.unfccc.int/ndcregistry/PublishedDocuments/India First/INDIA
INDC TO UNFCCC.pdf>
6
Prime Minister's Council on Climate Change, 'National Action Plan On Climate Change' (Government of
India 2008).
Specifically, “green bonds” which are used for environmentally friendly projects to further the
recovery of the nature due to climate change.

GREEN BONDS: INTRODUCTION

‘Green bonds’ are the fixed income financial instruments that are linked to promoting and
implementing climate change and environment solutions. With this instrument, the issuer of the
green bond gets the capital to finance green projects while the investors receive fixed income in
the form of interest. When the bond matures, the principal is repaid. In a way, green bonds are
the same as any corporate, in fact they are a subset of corporate bonds, where the use of proceeds
are pre-allocated to a green activity.7 The terms “Climate Bonds” and “Green Bonds” are used
interchangeably, the thin line of difference between the two was brought out by Mackenzie and
Ascui in a paper on climate change. It was that, the green bonds can be issued by either the
government or any corporate entity for environmental projects, whereas the climate bonds can be
only issued by the government, although with the same purpose and objective.8 The first green
bonds were issued by European Investment Bank and the World Bank in 2007. Though in 2007-
2012, the concept struggled to make a mark, but with the entrance of big corporate players, the
market started flourishing. The following is the graph which shows the volume of issues of
Green bonds in the global market: - State of Green Bonds in India:

7
TERI (The Energy and Resources Institute), 'UNLOCKING THE GREEN BOND POTENTIAL IN INDIA'
(2018).
8
Craig Mackenzie and Francisco Ascui, 'Investor Leadership On Climate Change: An Analysis Of The
Investment Community's Role On Climate Change, And Snapshot Of Recent Investor Activity' [2009]
Edinburgh Research Explorer.
 Green bonds are probably the most secured kinds of bonds, which pays a steady amount
of income throughout the following years till the maturity, and that’s when it’s repaid with a
premium. Although, in practicality, the green bonds focus on capital intensive technologies
which helps the recovery of the environment, but the method is not a guaranteed solution.
Basically, even when such funds are used for such environmental projects, these might fail to
have the expected impact on the environment, therefore these bonds also carry a moderate risk to
both the issuer and the investor. The issuer might use the funds accumulated from the bonds onto
these projects, which might not generate any positive effects and therefore, the company might
not be in position in future to give out steady payments for the investors. Although, the
machineries, technologies etc. are sanctified guaranteed methods by scientists from all around
the world, for the benefit of sustainable energy and human life. The non-renewable energy such
as fossil fuels, should be used as little as possible by the companies and the government, and the
capital-intensive technologies which uses renewable energies for further processes should be
used instead. This is the purpose of green bonds and that will directly help to further the cause of
climate change.

STATE OF GREEN BONDS IN INDIA

 The first green bond was issued by Yes Bank in 2015.9 The Climate Transparency’s
Brown to Green Report 2017, drew a comparison across the G20 countries in terms of their
green bond issuance as a share of the country’s overall debt market. According to them, among
the G20 countries, India ranks fifth. This highlights the existing scale and future scope in the
country to develop and grow green bonds as an instrument to accelerate green market
penetration. Green bonds in India are doing exponentially well in the market, with the ranking of
7th in the global market.

This highlights the existing scale and future scope in the country to develop and
grow green bonds as an instrument to accelerate green market penetration. The
withdrawal of the United States of America from the Green Climate Fund and a change in
priorities under the Trump administration has further increased pressure on India and
other emerging nations to source independent climate finance with lesser dependence on
international grants. Green bonds provide an innovative tool for bridging the gap betwee n
capital markets and climate change. 10

The Securities Exchange Boards of India (SEBI), has approved the final
memorandum in its board meeting on January 2016, and these are the following
highlights of the guidelines mentioned: -

1. What is “green”? Definition of Green Bonds: Although, the meaning of green

has been set open to various definitions, but the objectives must relate to
climate change adaption, biodiversity conversation, and to summarize the lists,
an environmental project which helps the cause of climate change.
2. Appointment of Independent Reviewer/Certifier: To promote transparency in
its dealings with these bonds for the investors, the credentials of the issuance
reviewed by an external entity is suggested. This practice is optional, not
mandatory. Using a third party/external reviewer is regarded as the best
practice, as many investors do not have the requisite resources to do the due
diligence.

9
Yes Bank Limited, 'YES BANK LAUNCHES INDIA’S FIRST GREEN INFRASTRUCTURE BOND ISSUE
OF INR 500 CRORES' (2015).
10
Hai-Bin Zhang and others, 'U.S. Withdrawal From The Paris Agreement: Reasons, Impacts, And
China's Response' (2017) 8 Advances in Climate Change Research.
 3. Monitoring the end-use of the proceeds: The issuers will have to disclose the
methods in which they will monitor the end-use of the proceeds of issuance of Green
Bonds
4. Reporting: At the time of annual filings by the issuer to the stock exchange, the
issuers of such bonds must disclose the list of projects that are to be funded through
the said proceeds.

Emphasis need be placed on the last of these principles, namely reporting. Due to the
nature of these bonds as not mere financial instruments but a stepping stone to a greener world,
reporting of the current state of affairs by issuers is a must. Green bond principles, i.e. the
merged SEBI guidelines provide a broad and flexible framework for doing such reporting
activities. The board has made an active effort to accommodate for the purpose of the green bond
as a financial instrument and as a medium for climate stabilization. It does so by allowing the
assessment of not only quantitative measures of money allocation, but also qualitative measures
and the impact on the environment. Additionally, such guidelines ensure trust and transparency
between the investors and the issuers.

SEBI GUIDELINES

The acknowledgement and expansion of this niche coupled with the introduction of these
principles and the rise in investing activities is an encouraging sight for both bond issuers and
environmentalists. Further, the Securities and Exchange Board of India has listed the following
benefits of issuing green bonds:

(i) Positive public Relations

Green bonds can help in enhancing an issuer’s reputation, as this is an effective way for
an issuer to demonstrate its green credentials.

(ii) Investor Diversification

 There are specific global pools of capital, which are earmarked towards investment in
Green Ventures. This source of capital focuses primarily on environmental, social and
governance (ESG) related aspects of the projects in which they intend to invest. Thus, green
bonds provide an issuer the access to such investors which they otherwise may not be able to tap
with a regular bond.

(iii) Potential for pricing advantage

The green bond issuance attracts wider investor base and this may in turn benefit the
issuers in terms of better pricing of their bonds vis-a-vis a regular bond. Currently there is very
limited evidence available in this regard, however as demand of green bonds increases it is likely
to drive increasingly favorable terms and a better price for the issuer. Further, with increasing
focus of the global investor community towards green investments, it is expected that new set of
investors will enter into this space leading to lowering the cost of funding for green projects.

The benefits stated by SEBI are intended to increase the practice of issuing bonds by
various issuers for better public relations, increasing the investor base and even provide a direct
incentive in the form of a higher price in the bond market. However, it is not just the investors
that are benefiting. Due to rising standards of living, pollution in India being a record high, rise
in Corporate social responsibility and climate sensitization, the green bonds market is the ideal
prospect for investors looking for a good return on investment in keeping with their ideals.11

CRITICISM OF SEBI GUIDELINES: ITS IMPACT ON GREEN BONDS

SEBI hasn’t introduced its own set of guidelines, though, the board has borrowed the
aforementioned green bond principles corollary to the existing SEBI regulations for issuance of
corporate bonds. Therefore, a question that arises is whether there should be a specified
comprehensive system for the issuance of green bonds alone? The answer to that lies both in the
definition of the green bond and in the green bond principles. There is no clear definition of a
green bond except that it is a regular corporate bond issued with the aim that proceeds will be
focused towards green activities. A legitimizing change was expected from the circular published

11
Securities and Exchange Board of India, 'Concept Paper For Issuance Of Green Bonds' (2015).
by the Securities and Exchange Board of India in May 2017, however it still failed to provide
any specific definition or criteria for a bond to be ‘Green’. If the circular is to be read closely,
instead of even attempting to define such bonds, it blatantly asks the issuer instead to define and
disclose their own measure of green bonds, in addition to ‘briefly’ detailing out the decision
making process followed to determine the eligibility of the project for green bond.

SEBI does however try to limit the expansive meaning of debt securities falling under
green bond by specifying some broad categories under clause 2.1, but the categories are a little
too broad to do any actual curbing to the meaning. For example, 2.1(g) just says “Climate change
adaption”, and (h) says “Biodiversity conservation”.12 This meaning gives a broad interpretation
for what is to be considered a green bond and what activity constitutes a green activity. For an
activity to be called a green activity, it needn’t be that it is an activity which doesn’t pollute or
damage the environment in any which way. It might merely be a substitute for a polluting
activity and have no direct positive impact on the environment except causing proportionately
lesser pollution. In essence, SEBI actually places all the powers of decision into the issuers hand
with no liability. The issuers of such bond get to reap the profits of issuing a green bond in the
form of increased goodwill and an extended reach to people who will not have invested in a
project damaging to the environment, while the fine print just provides for use of a ‘cleaner coal’
to make the project eligible for the ‘green’ tag. All guidelines, notices issued by SEBI with
regard to issuance of Green Bonds are simply procedural and informatory in nature, giving a lot
of leeway to the issuer to mold them to their own personal interest.

Michael Boardman, CFO of Sindicatum, a renewable energy company in Asia having

projects in India, pointed out the lack of presence of a “standard universal certification system”13
at the Annual Sustainability Conference in January 2019. For regular corporate bonds, there exist
various measuring tools, and credit rating agencies which tell us the credit worthiness of the
bond. However, there is no benchmark or guidelines which calculate the greenness of a bond.
What this does is allow companies to market their project as green while attracting investment
even if the environmental benefit is incidental. It even allows the corporates to change the

12
Securities and Exchange Board of India, Circular No.: 'CIR/IMD/DF/51/2017' (2017).
13
Boardman, M. Annual Sustainability Conference, The Green Debate (2019).
wordings in their objective to categorize it as a green bond. There exists a little humor in the fact
that the companies which forward a green project don’t necessarily need to be environment
conscious themselves. They can be marketing a green bond whilst cutting down forests to set up
factories at the same time.

The current outlook is that these bonds are voluntarily made green by the issuers and that it is the
goodness of these issuers that they are doing so, However, we forget that there is a lot they are
gaining from this too. At this point in time, there exists no framework for penalties is the issuer
diverts from their ‘green’ part of the objective and more importantly no legitimate way of even
checking whether the green standards are kept up. Although, the SEBI principles laid down are
quite broad and provide for in-depth assessment of the allocation of funds and the subsequent
impact on the environment, the circular asks the issuers themselves to create a standard and then
check upon themselves. Where is the accountability in all this?

Therefore, these guidelines are open to misuse and it is the duty of the Securities and
Exchange Board of India to be speculative. Thus, it is important for SEBI to set some objective
parameter for identification of a green activity within its framework.

As for the green bond principles created by SEBI, they do broadly appear to be aimed at
maximizing issuing activities and increasing funds toward green activities.

SEBI GUIDELINES: SUPPORTING GREEN BONDS

In its World Energy Investment Outlook report, the International Energy Agency (IEA)
wrote that annual investment in energy supply needs to steadily rise towards $2 trillion annually
to meet ever growing energy goals., of which more than $1 trillion goes into fossil fuel. Now, to
convert all of this investment into sustainable renewable energy seems like an impossible task for
which a new framework needs to be brought into place. This is where the Green Bonds
overcome all their drawbacks and become relevant. Instead of proposing an alternate platform or
marketplace for conversion into sustainable energy, Green bonds take advantage of an already
existing structure to attract investments. Dave Chen, Principal and Chairman of U.S.-based
sustainable investment firm Equilibrium argued about the benefits of an existing infrastructure in
‘The Green Debate’ at the Annual Sustainability Conference. He points out that since the Green
bonds are introduced in an already existing marketplace, even investors and buyers who do not
care about the environment at all, may also buy such bond14 as it essentially is another corporate
bond at the end of the day.

The green bond issuance attracts wider investor base, and this may in turn benefit the
issuers in terms of better pricing of their bond vis-a-vis a regular bond. Currently there is very
limited evidence available in this regard, however as demand of green bonds increases it is likely
to drive increasingly favorable terms and a better price for the issuer. Further, with increasing
focus of the global investor community towards green investments, it is expected that new set of
investors will enter into this space leading to lowering the cost of funding for green projects.

The benefits stated by SEBI are intended to increase the practice of issuing bonds by
various issuers for better public relations, increasing the investor base and to even provide a
direct incentive in the form of a higher price in the bond market. However, it is not just the
investors that are benefiting. Due to rising standards of living, pollution in India being a record
high, rise in Corporate social responsibility and climate sensitization, the green bonds market is
the ideal prospect for investors looking for a good return on investment in keeping with their
ideals. Moreover, two- or three-fold oversubscription of green bonds of various entities such as
Yes Bank is a healthy sign of how the investors in the Indian economy are determined to
increase green activities.

Issuance of green bonds or encouragement of any green activity is believed to be the

burden of the government sector in any economy. Thus, we find that the first green bonds were
issued by huge financial entities such as the World Bank and the European Investment Bank as
late as 2007. These institutions envisage a greener global economy and take initiative to set a
precedent for following institutions. Through the guidelines set by the Securities and Exchange
Board of India, it is clear that they are focused on inviting issuers from the private sector and
expanding the green bonds market to corporate entities. Thus, unlocking the green bond potential
in India through easier and flexible guidelines (which do require strict speculative action) for
inviting issuers, as well as maintaining benefits for investors in keeping with benefits listed for
the issuers themselves.

14
Chen, D. Annual Sustainability Conference, The Green Debate (2019).
CONCLUSION

Since, there is a framework already provided for the issuance of a corporate bond in
addition to the green bond principles, there is a broad category within which such “green” bonds
can be issued. A green bond doesn’t appear to be the perfect solution for environmental
problems, but it is one of the best financial instruments contemporarily available. There is huge
potential in this market as opposed to government spending, socially active institutions,
volunteer work, etc. since the green bond is not just an instrument for solving environmental
degradation; but is also an instrument through which investors can benefit with fixed interests
not unlike a regular corporate bond. It is true that there is scope for misuse of these bonds with
respect to the ambiguity arising out of the definition of “green” and the qualification of an
activity as green, but it is upon SEBI to minimize such misuse through strict speculation and
regulatory practices as written in the principles. Even so, the principles have more to offer than
they must take away.

PROJECT BY:

1. Umang Pathak
2. Abhipriy
Burman
3. Aditya
Mahajan.
 BIBLIOGRAPHY

1. HULME, MIKE (2016). CONCEPT OF CLIMATE CHANGE, IN: THE INTERNATIONAL ENCYCLOPEDIA OF GEOGRAPHY.
WILEY-BLACKWELL/ASSOCIATION OF AMERICAN GEOGRAPHERS (AAG).

2. 'GLOBAL CLIMATE CHANGE: EFFECTS' (CLIMATE CHANGE: VITAL SIGNS OF THE PLANET, 2019)
<HTTPS://CLIMATE.NASA.GOV/EFFECTS/> ACCESSED 15 APRIL 2019.

3. CLIMATE ANALYSIS INDICATORS TOOL VERSION 3.0. WORLD RESOURCES INSTITUTE, WASHINGTON, DC, UNITED
STATES (2006)

4. BLOOMBERG, 'THE CLEAN ENERGY COUNTRY COMPETITIVENESS INDEX' (2015)

<HTTPS://BNEF.COM/INSIGHTDOWNLOAD/13293/PDF/>

5. “UNFCC Report” (NDC Registry) <http://www4.unfccc.int/ndcregistry/PublishedDocuments/India

First/INDIA INDC TO UNFCCC.pdf>

6. Prime Minister's Council on Climate Change, 'National Action Plan On Climate Change'

(Government of India 2008).

7. TERI (The Energy and Resources Institute), 'UNLOCKING THE GREEN BOND POTENTIAL

IN INDIA' (2018).

8 Craig Mackenzie and Francisco Ascui, 'Investor Leadership On Climate Change: An Analysis

Of The Investment Community's Role On Climate Change, And Snapshot Of Recent Investor

Activity' [2009] Edinburgh Research Explorer.

9. Yes Bank Limited, 'YES BANK LAUNCHES INDIA’S FIRST GREEN INFRASTRUCTURE

BOND ISSUE OF INR 500 CRORES' (2015).

10. Hai-Bin Zhang and others, 'U.S. Withdrawal From The Paris Agreement: Reasons, Impacts,

And China's Response' (2017) 8 Advances in Climate Change Research.

11. Securities and Exchange Board of India, 'Concept Paper For Issuance Of Green Bonds'

(2015).

12. Securities and Exchange Board of India, Circular No.: 'CIR/IMD/DF/51/2017' (2017).

13. Boardman, M. Annual Sustainability Conference, The Green Debate (2019).

14. Chen, D. Annual Sustainability Conference, The Green Debate (2019).