The Reserve Bank of India (RBI), in a recent study, noted that the cost of issuing green bonds in India has typically been higher than other types of bonds. This is primarily due to the occurrence of asymmetric information.
Understanding Green Bonds
Green bonds are debt instruments used to raise capital for financing ‘green’ projects in areas such as renewable energy, clean transportation, and sustainable water management among others. They take the form of loans made by an investor to a borrower, often a corporation or government entity, with a fixed interest rate traditionally paid to investors.
These bonds were first introduced in 2007 by various development banks including the European Investment Bank and the World Bank. In 2013, corporations also began participating, contributing significantly to the growth of green bonds.
Regulations and Benefits of Green Bonds
The Securities and Exchange Board of India (SEBI) has established disclosure norms for the issuance and listing of green bonds in India. Aside from providing funding for environmental initiatives, these bonds also enhance the reputation of issuers and help demonstrate their commitment to sustainable development.
Green bonds can also assist in fulfilling climate agreements and other ‘green’ commitments, offering a lower interest rate than traditional bank loans. Furthermore, these bonds play a significant role in increasing financing to burgeoning sectors like renewable energy, supporting India’s path to sustainable growth.
Key Findings from RBI’s Recent Study
Since 2018, green bonds have constituted only a marginal 0.7% of all bonds issued in India. Conversely, bank lending to renewable energy made up about 7.9% of total outstanding bank credit to the power sector by March 2020. The majority of green bonds in India are typically issued by public sector units or corporates with better financial health.
Challenges Faced in Green Bond Issuance
One of the key issues facing green bonds in India is the high coupon rate. Green bonds issued since 2015 with five to ten year maturities have had higher average coupon rates than corporate government bonds of similar tenure. This, combined with asymmetric information, contributes to high borrowing costs.
Asymmetric information, or “information failure,” arises when one party involved in an economic transaction possesses more significant knowledge than the other. The development of a comprehensive information management system may help lower borrowing costs and enhance resource allocation in this sector.
Additional Challenges and Suggestions
The use of green bond proceeds has been subject to debate over whether the funded projects are indeed ‘green.’ Other challenges include the lack of credit ratings for green projects and bonds, and the shorter tenor period (about 10 years) of green bonds in India, compared to typical loans which are for a minimum 13 years duration.
The Way Forward
To foster a robust green bond market, it’s crucial to harmonise both international and domestic guidelines and standards for green bonds. A clear consensus on what qualifies as green investments is also needed, alongside capacity-building efforts to educate issuers in emerging markets about the benefits of green bonds. Public sector investment in green bonds could boost private investment and build investor confidence in this burgeoning market.