India's green bond issuances 3.8% of domestic corporate bond market: Report

Green bond market in the country, which is projected to need more than $10 trillion to meet its green goals, accounts for just 3.8% of the overall outstanding corporate bonds worth more than $500 bn

The green bond market in the country, which is projected to require more than USD 10 trillion to meet its green goals, accounts for just 3.8 per cent of the overall outstanding corporate bonds worth more than USD 500 billion, says a report.

In a report on Friday, Fitch Ratings said that as of January 2023, GSSS (Green, Social, Sustainability and Sustainability-linked Debt) bonds accounted for USD 20 billion or 3.8 per cent of the country's overall corporate bond market while the government bond market is more than double this size.

One of the main reasons for the small size of the domestic green bond market is that issuers are heavily concentrated in the energy sector and especially renewable energy led by solar projects, it said.

As per the report, another reason for the low green bonds base is that all of them are denominated in the rupee and held by domestic banks, insurers and the RBI while vast majority of issuers -- as much 90 per cent -- prefer issuing GSSS bonds in dollars.

It can be noted that the Reserve Bank of India (RBI) issued Rs 16,000 crore worth sovereign green bonds in two equal tranches on January 23 and February 9, respectively.

The maiden issuance, according to Fitch, reflects the growing policy focus to scale up domestic financing capacity on climate mitigation and adaptation. It also expects these bonds will be held largely by domestic investors due to the incentives from the national climate policy.

The proceeds from the sovereign green bonds will go towards projects that meet the decarbonisation targets, which include achieving net-zero emissions by 2070, reducing emission intensity of GDP by 45 per cent by 2030 over the 2005 levels, and increasing the share of non-fossil fuel energy resources to 40 per cent by 2030.

The country's sovereign green bond framework, published in October 2022, identifies how the proceeds from green bonds will be allocated to projects like renewable energy, energy efficiency, clean transportation, sustainable water and waste management, and green buildings.

The report listed out many difficulties domestic issuers face in accessing the domestic capital market such as low credit rating, lack of credit guarantees, and low investor demand for local bonds.

This has led to a shallow domestic sustainable debt market in contrast to the large amount of infrastructure capital being allocated to renewable energy, which in FY22 stood at USD 14.5 billion, it added.

According to the rating agency, new manufacturing policies, especially the PLI scheme that seeks to boost domestic manufacturing of wind turbines and solar components, and other incentives will spur further GSSS debt issuances.

Renewable generation will see an annual average growth of 8.7 per cent between FY22 and FY32, it added.

As per an estimate by the Council on Energy, Environment and Water, over the years, the country will need USD 10.1 trillion to scale up generation from renewable energy and associated generation, distribution and transmission infrastructure.

Even though the maiden sovereign green bond sale was successful, Fitch said that for the segment to gain more traction, more structural changes are needed towards improving financing conditions by offering public-sector credit guarantees to lower financing cost, or increased default protection for investors through credit default swaps.