November 3, 2021 4:47:47 pm
Written by Alfonso Garcia Mora and Hector Gomez Ang
Covid-19 changed the discourse of economies globally, cautioning against unexpected future crises. As businesses struggle to make up lost revenue, workers stretch to keep jobs, incomes fall, and gender gaps worsen, governments are overwhelmed trying to chart their recoveries.
There is a silver lining – the pandemic has highlighted the urgency of a climate-smart roadmap and shifted perceptions to accept that climate action is an opportunity, not a cost, which must be at the core of the development agenda
While world leaders are gathered at the COP26 summit to discuss pathways to achieve Paris Agreement goals, a green and inclusive roadmap can help quickly rejuvenate South Asia’s economy, paving the way for greater resilience and a lower carbon footprint.
In India, the third-largest global emitter of CO2, the stakes are high. The country is profoundly vulnerable to climate change, which could intensify heat waves, pluvial floods, droughts, and severe storms.
As India rebuilds, leveraging innovative financial instruments such as green and sustainability-linked bonds are crucial because their proceeds are earmarked for projects with environmental benefits. For example, the coupon of a sustainability-linked bond can be linked to specific key performance indicators (such as the reduction in greenhouse gas emissions), creating a quantitative commitment for the issuer in their climate agenda. Over the past decade, green finance has moved from a niche market to one that is increasingly mainstream. Globally, the issuance of green debt instruments more than doubled to $227.8 billion in the first half of 2021, as investors adopt green strategies. More than 30 per cent of net flows into investment funds in the second part of 2020 went to climate and sustainable funds. For issuers, green bonds can broaden their investor base while sending a positive signal to the market.
India is on the right track. Having made “consistent and measurable progress” in its energy transition journey, the country ranked 74th in the World Economic Forum’s Energy Transition Index 2020. With its energy demand slated to double in under 20 years, IFC estimates India’s climate-smart investment potential is more than $3 trillion by 2030.
This includes renewable energy ($404 billion), electric vehicles ($667 billion), green buildings ($1.4 trillion), and climate-smart agriculture ($194 billion). This volume of investments needs both public and private sector initiatives — about half of the total investment is expected to come from the private sector.
This is where green bonds can help, by mobilising and channeling private sector capital to the clean energy sector, energy-efficient buildings, water, and transport. India is the second-largest emerging market for green bonds and diversifying bond markets can contribute to a sustainable and resilient roadmap by expanding markets to new issuers and enabling transactions in new currencies.
Green bonds come with a guarantee for climate-smart development. By funding renewable and energy-efficient development and adaptation initiatives, they can help countries like India meet ambitious climate goals and transition to a low carbon economy. Local currency green bonds also indicate a market is viable to foreign investors — a priority for IFC and the government of India as they work to strengthen local capital markets.
IFC has played a leading role in developing India’s green bond market, issuing the first green “Masala” bond on the London Stock Exchange, priced in Indian rupees in 2015. Four years ago, we invested approximately $103 million in L&T Infrastructure Finance Company Ltd. by subscribing to the first official green bonds in India to help increase loans for solar power projects.
More recently, we supported renewable energy developer, Continuum Green Energy Ltd, to achieve a more sustainable energy mix and support recovery efforts. IFC subscribed to 10 per cent of the bond, which listed on the Singapore Stock Exchange, raising $561 million.
Nascent products like sustainability-linked bonds and climate transition finance are the latest instruments in the transition to net-zero. This month, Sembcorp Industries, one of the biggest energy producers in Asia, launched the first sustainability-linked bond in Southeast Asia with a $675 million offering, anchored with a $150 million IFC investment. This is the largest such instrument to be issued in the region, demonstrating the viability of a new asset class and the move from “brown to green”.
The Securities Exchange Board of India introduced guidelines on issuing and listing green bonds in 2017, creating room for further expansion. With an eye on well-defined rules and structures, this could allow for other instruments, including blue, social, and sustainability-linked bonds.
Tax incentives or regulatory incentives can encourage local banks to subscribe to green bonds. Policymakers should also think on establishing frameworks that promote competition and innovation. Sustainable investors may also offer financial stability benefits as they tend to be less sensitive to short term returns.
We speak from experience. IFC is a founding member of the Green Bond Principles (2014) which promote market transparency, accuracy, and integrity in reporting to avoid “greenwashing.” In India, capacity building and knowledge sharing will help both issuers and investors better understand green bonds. A green taxonomy—criteria for “green” investments—may, for example, help the Reserve Bank of India build a conducive ecosystem.
A new generation of socially aware investors, increasing knowledge of the risks of climate change to their portfolios, and pressure from stakeholders, are causing more retail and institutional investors to shift investment decisions to align with net-zero targets, potentially making green and sustainability-linked bonds an investment vehicle of choice.
The World Bank Group’s recently launched Climate Change Action Plan aims to deliver record levels of climate finance to developing countries, reduce emissions, strengthen adaptation, and align financial flows with the Paris Agreement goals.
Reducing emissions will help countries like India tackle climate change while pursuing broader development objectives, key to its sustainable and inclusive growth agenda.
Alfonso Garcia Mora is regional vice president for Asia and Pacific at the International Finance Corporation (IFC) and Chair of the Sustainable Banking and Finance Network (SBFN), and Hector Gomez Ang is regional director for South Asia at the International Finance Corporation
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