A framework for sovereign green bonds a step in the right direction but has miles to go

Moving a step ahead towards boosting investor confidence in financing climate action, the Government of India (GoI) has developed a framework for Sovereign Green bonds (SGrB), in which it defines the ‘green’ sector and the process to ensure that investments will be directed to it. The government has sought an independent Second Party Opinion (SPO) on this framework to establish its credibility. However, the SPO has underlined some loopholes in the framework.

With the increasing need for financing climate mitigation and adaptation activities, several governments, globally, have issued sovereign green bonds. A sovereign green bond is a debt instrument issued by the central or state government to borrow money from investors with the commitment that the mobilised fund will be spent on climate or eco-system related activities.

This phenomenon began in 2016 with the Poland government issuing its first sovereign green bond. As many as 38 central governments that have issued green bonds so far, have published a green bond framework as of September 2022. If a government issues a SrGB, especially the first one, it improves the overall standard of green issuance across the nation, according to Bank for International Settlements (BIS). Other companies also begin following the standard set by the initial SrGB.

The SGrB framework in India was released on November 9, one and a half months after the announcement of capital mobilisation through SGrB. The need for such a framework is highlighted in the fact that India’s climate actions are largely financed from domestic resources so far and it is now targeting global financial resources as well. SGrB issuances under the framework will help the government tap funds from potential investors for public sector projects to reduce carbon intensity which is a measure of greenhouse gases emitted per unit of electricity produced.

The framework underlines how the government plans to use this money. It says that all eligible green expenditures will include public expenditure in the form of investment, subsidies, grants-in-aid or tax foregone, R&D expenditures in public sector projects that help reduce the economy’s carbon intensity.

Responding to the development, the Chief of Programs at Shakti Sustainable Energy Foundation, Koyel Mandal told Mongabay-India that it is a welcome step that the government has taken by issuing a sovereign bond because the country has not had one so far. “It will be the first sovereign, so I think it is important to lay the foundation. There is a lot of mistrust and green-washing in the sector. So, it is good to put credibility standards and create a framework for green bonds,” he says.

When asked about the Green Bond Framework and the SPO, Neha Kumar, Head of the India programme, Climate Bond Initiative, which works to mobilise global capital for climate action, praised the framework released by the government, saying that it is simple and clear to understand and takes a long-term view.

It is also great that the green bond framework includes adaptation and does not just focus on mitigation-related activities, because the state has a huge role to play in financing adaptation where the private sector has been slow to come in, she said.

The blueprint

The framework draws a blueprint for investments in the green sector, including how to ensure transparency in picking green projects. It also outlines how the government will monitor the investments.

Green projects, according to the framework, include renewable energy, energy efficiency, clean transportation, climate change adaptation, green building, sustainable management of living natural resources and land use, sustainable water and waste management, pollution prevention and control, and terrestrial and aquatic biodiversity conservation projects.

The framework deals with each sector separately and lists activities that need to be focussed on to achieve the larger purpose of sovereign green bonds. For example, in the renewable category, the framework lists activities such as investment in solar, wind, biomass, and hydropower energy projects that integrate energy generation and storage. It also includes incentivising the adoption of renewable energy. Similarly, in the energy efficiency category, the framework lists the construction of low-carbon buildings and energy-efficiency retrofits to existing buildings, along with other activities.

Projects aimed at making infrastructure more resilient are part of the adaptation category, which includes investments in information support systems, such as climate observation and early warning systems.

Under sustainable management of living natural resources and land use, activities such as fishery and aquaculture, animal husbandry, sustainable forestry management, and certified organic farming are mentioned.

Projects relating to coastal and marine environments and biodiversity preservation, like the conservation of endangered species, habitats, and ecosystems, are listed under the terrestrial and aquatic biodiversity conservation category. Similarly, soil remediation, greenhouse gas control, waste management, waste prevention, waste recycling, and waste reduction fall into activities where these funds could be invested.

With the increase in investment in these sectors through SGrB, the government claims to achieve several objectives, such as climate change mitigation, net-zero, climate change adaptation, environment protection, and natural resource conservation.

The framework also lists sectors which are completely no-go areas for SGrb.

Along with fossil fuel, the government bars nuclear power generation, direct waste incineration, alcohol, weapons, tobacco, gaming, or palm oil industries etc. Similarly, renewable energy projects generating energy from biomass using feedstock originating from protected areas, landfill projects and hydropower plants larger than 25 MW will not get the investment from SGrB funds.

For evaluating and selecting a particular project, the framework talks about a Green Finance Working Committee (GFWC). The concerned ministry will do the initial evaluation of the project in consultation with experts. Subsequently, the proposal will go to GFWC. It will comprise the Chief Economic Advisor (Chair), Additional Secretary, Infrastructure Finance Secretariat, the Ministry of Environment, Forest and Climate Change, the Ministry of New and Renewable Energy, a climate specialist from NITI Aayog, the Ministry of Finance and any other ministry co-opted from time to time as its members.

For transparency, the framework talks about the allocation report, which will be updated annually. The allocation and utilisation of green bonds will also be under the purview of the Comptroller and Auditor General.

As per the official document, CICERO, an Oslo-based second opinion provider (SOP) of green bond frameworks, has reviewed India’s green bond framework and approved its alignment with the ICMA Green Bond Principles. In the absence of any legal framework, the world community follows the ICMA principles to evaluate green bond standards.

When asked about the governance details outlined in the framework and whether it serves the purpose of transparency, an expert requesting anonymity says that the framework does well on the governance part by forming a committee. However, there is limited space for external views which could have been sought when finalising the projects by the approving committee. This would have brought a wealth of national and international experience, making the process very efficient and effective, says the expert, citing the example of France and U.K. which have roped in external experts in the process of green bond issuances.

Shantanu Srivastava, an energy finance analyst from Institute for Energy Economics and Financial Analysis (IEEFA) pinpoints a few misses. One of the major misses is the framework considers funding the expansion of compressed natural gas (CNG) infrastructure. “Such a provision risks diluting the framework’s credibility as CNG is a fossil fuel that cannot be considered green. Serious environmental, social and governance (ESG) investors will consider this a red flag,” he writes in an analysis for IEEFA, adding that there is a lack of clarity about the use of unallocated funds and whether the fund will refinance existing projects.

Miles to go

In its review, CICERO the SPO categorises the framework as ‘medium green’, raising several questions. In its Shades Of Green methodology, ‘medium green’ is allocated to projects and solutions that represent a significant step towards the long-term vision but are not quite there yet. ‘Dark green’ is given to those projects that correspond to the long-term vision of a low-carbon and climate-resilient future. And ‘light green’ represents the transition activities that do not lock in emissions.

While evaluating India’s framework, CICERO has given dark or medium-to-dark green for renewable energy, energy efficiency, clean transportation, and adaptation categories. But, categories like sustainable water and waste management, pollution prevention and control, and others have received light or light to medium green.

The agency lists the strengths of the framework, such as it reflects India’s ambitions to expand renewable energy production and reduce its economy’s carbon intensity.

The agency also lists some of the pitfalls with the framework by saying that the principles for selecting green projects remain general. The broadly defined project categories create uncertainty about what type of expenditures could be financed and broader climate risks associated with spending. The framework’s project categories generally lack quantified thresholds.

The SPO has raised concerns that the framework may support expenditures related to biofuels, solid biomass, and bioenergy plants with inherently wider climate risks. There are other risks too, it notes, pointing out that the expenditures eligible under the framework may support the substitution of natural forests with monoculture plantations, which are less biodiverse and less resilient to climate change.

Mongabay-India reached out to SPO to understand the framework’s evaluation process, but Christa Clapp, co-founder and managing partner of the company, cited confidentiality terms with clients. However, she shared the general process of an independent review saying, “It begins with reviewing documents provided by the issuer and analysing according to our Shades of Green methodology.” CICERO’s Shades of Green has evaluated many (at least six) sovereign bonds, she claims.

Echoing the SPO’s findings, Kumar of the Climate Bond initiative points out that many of the framework’s eligible project categories do not specify exact criteria.

Given that the SPO has raised concerns about the framework in its present form, what should India’s next steps be? Kumar replies, “This is India’s maiden issuance. We have to engage with the investors with the best we have and it is possible to do so. This is our opportunity to build investor confidence in our green growth story. This issuance will also be watched by industry and many domestic and international stakeholders.”

“First and foremost, we need to harvest maximum benefits out of this issuance. I hope that this maiden issuance focuses more on project categories which are dark green, which are able to match the market gold standard recognised by investors. The option to certify is also quite open for the government to consider. That is a great engagement tool and builds investor confidence. In essence, the first issuance must be as robust and neat as possible to meet investor expectations, get preferential terms and actually, set the local markets rolling and build a robust programme of issuance as we go along,” she says.

Read more: [Commentary] In push for sovereign green bonds, transparency is key

Banner image: A group of student volunteers cleaning Fort Kochi beach. Projects relating to coastal and marine environments and biodiversity preservation fall under the sovereign green bond framework. Photo by Kundan Pandey.