The recent issue of the World Investment Report puts the current stock of green bonds at $1 trillion. The search for better returns by international investors has resulted in a number of firms and financial institutions in the emerging markets joining the green bond bandwagon. There is a huge demand for bonds with sustainability principles ingrained, referred to as sustainable and renewable investment, from pension funds, sovereign wealth funds and insurance companies. The International Organisation of Securities Commissions (IOSCO) has cautioned against a “greenwashing” happening in the bond markets with a large number of players issuing bonds without proper sustainable projects.
The demand for climate finance under the intended nationally determined contributions (INDCs) to the United Nations Framework Convention on Climate Change (UNFCCC) and their time-bound nature have resulted in a large increase in the demand for funds. In the last two years, there has been a surge in green bond issuance by emerging market economies. What had started as a trifle has now become a stock of $1 trillion, with number of Indian firms and financial institutions also mobilising resources through this route.
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Green bonds used for corporate takeovers
The firms are using their own funds for undertaking mergers and acquisitions in the renewable energy space, and financing new projects through sustainable finance available at low costs. Those projects are further sold to others for a profit. This means sustainable finance is being tapped to make huge capital gains. For the initiation of the project, they mobilise funds for low interest rates (i.e., at a greenium ) compared with other bonds. In other words, the bond holders would get lower interest rate and investors makes a great profit. Isn’t this violation of the IOSCO principles?
In October 2020, SB Energy Holdings, a joint venture floated by Soft Bank and Bharti Enterprises, raised $333 million for a 900 MW installation in the Phalodi-Pokhran Solar Park in Rajasthan. Of course, carbon footprint gets reduced in this process and the idea driving green bonds makes sense. Adani Green Energy Ltd (AGEL) bought this venture for $3.5 billion to raise its renewable energy capacity by 5 GW. But this deal is not contributing to the overall reduction of carbon footprint of the country. This all-cash deal in May 2021 made AGEL the largest solar player in the country.
Adani Green raised $750 million via 3-year green bonds at a coupon rate of 4.375% with specific project proposals that follow the Green Bond principles. Many others are in the queue. Different banks including HDFC Bank, Yes Bank, Axis Bank and State Bank of India have also mobilised funds through green bonds. The rate of interest in dollar terms is not as low for the emerging market firms in India.
Given that their revenues are from the non-tradable sector denominated in rupees, it would be best if the firms and institutions hedge against possible exchange rate risks, lest they end up in the same situation as Suzlon and others in 2010 when the rupee depreciated against the dollar.
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A case for government issued green bonds
That said, would it be appropriate for a few firms to have larger share in the renewable energy capacity in our country? Shouldn’t the state play a large role? From Standard Oil to Google, the tendencies towards restrictive practices among monopolies have been rampant. When these avenues of renewable energy were nowhere near profitable, the government was the sole player in the field. Even now the subsidies issued by the government and the readiness to purchase power to the national grid has been serving as an inventive for initiatives in this regard. Can’t the state electricity boards tap such sources of energy and float projects?
Different layers of government in China tapped the international debt and securities market for green energy, but a large share of these funds have been mobilised in local currency. Though there is an inevitable import component for many of the projects, given non-tradable nature of the business, it would be worthwhile tapping the resources denominated in local currencies to avoid exchange rate risks.
The 15-year Next Generation bond issued by the EU in September 2021 towards mobilising 12 billion euros was oversubscribed 11 times. This is expected to finance 37% of the recovery and reinvestment plans of EU member states. Reflective of the low interest rates in the global economy, the EU has mobilised the funds for a yield of just 0.453%. With states starved of resources, why can’t the Indian government have such a Great Indian Green Deal?
As per the guidelines issued by SEBI in 2017, there are extant projects on sustainability for the which the funds mobilised through green bonds could be spent. This includes, inter alia, afforestation, sustainable forestry and biodiversity conservation.
In its submission to the UNFCCC, India has stated clearly its commitment towards reduction of emissions intensity of its GDP by 35% by 2030 from the 2005 levels. It has committed to increase its forest cover to 33% of the geographic area from the current 24%. Further the 14th Finance Commission through the assignment of 7.5% weight for the fiscal transfers to the states has included ratio of the forest cover in the state to the total forest cover. A transfer of $6.9 bn is done to the states, i.e., $179 per hectare of forest. This is unparalleled in any part of the world. Why can’t the government issue bonds to enhance forest cover?
Why aren’t the governments of Kerala or Karnataka, and six the northeastern states putting their best foot forward in this regard? When are we going to witness bonds issued towards preservation of the Western Ghats and the Silent Valley? Is it not possible for departments to sit together on themes blending sustainable tourism and biodiversity preservation.
ANERT, KFRI and KTDC in Kerala should seriously think about serious projects in this regard. There should be no more Amazon fires — the world cannot afford such risks. This issuance of bonds is the best way to assure that the forest cover is not depleted. However, one has to wary of exchange rate risks. Is it possible to issue green masala bonds for a greener India?
(Dr Krishnakumar S teaches economics at Sri Venakteswara College, University of Delhi.)
Krishnakumar S is a New Delhi-based economist. He teaches economics at Sri Venkateswara College, University of Delhi.