Securities

Towards Sustainable Finance: Strengthening the Credibility of Green Bonds

By- Pritha Lahiri & Varil Sheth

INTRODUCTION: A PRECLUDE TO GREEN BONDS

Green bonds are a type of debt instrument used to finance projects with environmental benefits. With the growing focus on sustainable development, the market for green bonds has been growing rapidly. The outstanding value of the green bond market exceeds US$700 billion, and its structure has gained increasing traction and support from both issuers and investors on an annual basis. India made a historic move on January 25, 2023, by launching its inaugural Sovereign Green Bond, valued at INR 80 billion. This significant step showcases India’s entry into the green bond market, underlining its commitment to sustainable finance and addressing environmental challenges.

However, concerns have also been raised about the authenticity of the “green” label associated with these bonds. To address these concerns, the Securities and Exchange Board of India (“SEBI”) recently introduced new regulations for green bonds. The amendment to the SEBI Listing Obligations and Disclosure Requirements (hereinafter ‘LODR’) Regulations, 2015 requires issuers to disclose detailed information about the use of funds raised through green bonds, the environmental impact of the project, and the methodology used to determine the eligibility of the project for green financing.

The article explores SEBI’s recent regulatory amendments aimed at promoting the use of green bonds. It also delves into the limitations of the new regulations and suggests alternatives to improve the credibility of green bonds by taking into account the learnings from other jurisdictions. Lastly, it seeks to raise awareness about the importance of investing in environmentally sustainable projects and to encourage transparency and accountability in the green bond market.

A CLOSER LOOK ON THE CURRENT FRAMEWORK

 SEBI has recently introduced Disclosure Requirements for Issuance and Listing of Green Debt Securities wherein it has requested the issuer to make additional disclosure, in particular with regard to the environment sustainability objectives of such debt securities in the offering letter/document, which are as follows:

  • Additional Disclosures for Green Debt Securities Issuance

Issuers intending to issue green debt securities must provide extra information in the offer document for public issues/private placements. These disclosures include:

  1. A statement addressing environmental sustainability goals related to green debt securities.
  2. Details regarding the system and procedures involved.
  3. An estimated breakdown of the proceeds raised through green debt security issuance, indicating the distribution between project financing and refinancing.
  4. Information about the intended temporary placement of unallocated and unutilised net proceeds from the issuance of green debt securities.
  • Additional Continuous Disclosures
  1. Issuers must provide details about the implementation of a mitigation plan for perceived social and environmental risks in their annual report.
  2. Disclosure of the environmental-impact reporting of projects financed by green debt securities is also mandatory.
  • Independent Third-Party Reviewer/Certifier

Issuers must appoint an independent third-party reviewer/certifier for green debt securities who will assess and certify the processes involved in the issuance of green debt securities.

  • Responsibilities of Issuer
  1. To ensure proper decision-making, a process is required to determine the ongoing eligibility of projects/assets for green debt securities. This process includes considering environmental objectives and assessing eligibility.
  2. Projects/assets funded by green debt securities must meet the documented objectives of such securities.
  3. The utilisation of proceeds from the securities must align with the disclosed purposes in the offer document, and no diversions are permitted without prior communication and consent.

 

DRIVING SUSTAINABLE GROWTH: LESSONS FOR INDIA’S GREEN FINANCE LANDSCAPE

SEBI’s guidelines on green bonds aim to promote green financing in India. However, certain issues like a lack of clarity on disclosing and tracking proceeds from multiple issuances, the absence of a robust green taxonomy for defining eligible assets, and the absence of specific guidelines for the use of proceeds still exist. To address these loopholes, SEBI can implement the following solutions.

Green Taxonomy

The current regulations do not demonstrate a strong, scientifically-based green taxonomy to offer a correct definition and eligibility standards for green and transitory assets. There is ambiguity in defining what constitutes a green asset or project in the absence of a precise taxonomy. As a result, the standards for establishing eligibility for green bonds are unclear and inconsistent. It could be challenging for investors to evaluate the environmental impact of their investments. It is thus important to develop a comprehensive green taxonomy that includes well-defined eligibility criteria for green and transitory assets, taking into account both Indian and global standards.

In this regard, India can take cues from the EU wherein EU Green Bonds allocate all funds raised to projects that align with the EU Taxonomy Regulation, as long as the sectors are already covered by it. In situations where industries are not yet covered by the EU Taxonomy Regulation, there is a provision for a 15%  flexibility allowance. This flexibility pocket offers some room for investments until they are fully included in the existing taxonomy structure.

Green Investment Fund

Establishment of Green Investment funds that invest money in businesses, initiatives, and projects that support preservation of resources, renewable energy, and other beneficial environmental practices can be a thoughtful option. The utilisation of the proceeds from green debts can be considerably improved by establishing a special Green Investment Fund. Creating a specialized fund with the explicit goal of investing only in environmentally friendly things is part of this creative response. A thorough due diligence process would be in place to find qualified investments that support the fund’s sustainability objectives.

By expanding its portfolio across many businesses and sectors, the Green Investment Fund would make sure that funds are awarded to a variety of green projects. These might involve the development of ecologically friendly infrastructure, the use of renewable energy sources, the promotion of sustainable agriculture, and the use of clean transportation methods. Additionally, it would actively seek out partnerships with governmental bodies, impact investors, and development banks, which could increase the impact of its endeavours.

Investor engagement would be the Green Investment Fund’s top priority. Through open communication and regular updates, investors would have access to information about the specific projects and assets in which the fund invests.

Green Bond Exchanges

Green bond exchanges act as specialised marketplaces exclusively for the trading and listing of green bonds. These exchanges may provide issuers with greater visibility, drawing a broader range of investors with an interest in sustainable investments. They increase liquidity and price discovery by offering a centralised market, making it simpler to purchase and sell green bonds. By setting listing standards and criteria for green bonds, green bond exchanges also help to standardise the market, increase investor confidence, and ensure consistency.

Moreover, by simplifying the assessment and reporting of the environmental effect of projects financed by green bonds, green bond markets can support transparency and accountability. These specialised exchanges can play a key role in advancing the development of the green bond market, bringing together issuers and investors, and allocating funding to initiatives that promote environmental sustainability.

Inspiration can be taken from Luxembourg, which is home to the world’s first Green Exchange, wherein 50% of the total green bonds across the world have been listed. It is solely dedicated to sustainable securities, with the primary goal of unlocking sustainable capital and redirecting capital flows towards sustainable investment projects.

Providing Tax Incentives

The current regime in India does not offer any tax exemption on Green Bonds, which ultimately leads to investor dissatisfaction. Tax incentives can play a crucial role in promoting the issuance and circulation of green bonds. Governments can provide tax benefits, such as reduced tax rates or tax exemptions to issuers and investors in green bonds.

By reducing financial burdens and providing a competitive advantage, tax incentives encourage more issuers to enter the green bond market, expand the pool of available green investments, and drive capital toward sustainable projects. This has been further emphasised by the Asian Development Bank in its Working Paper on Policy Support in promoting Green Bonds in Asia where they identified that certain policies relating to green bonds, like grants and tax incentives for green bonds, as well as collaboration are successful in encouraging the issuance of green bonds in the private sector in Asia.

Furthermore, many countries, such as the US, China, Sweden and France, provide tax incentives for green bonds to promote sustainable finance. Such tax incentives serve as powerful policy tools in advancing sustainable finance, addressing environmental challenges, and promote a conducive environment for these bonds.

Implementing these solutions can help address the potential loopholes in SEBI’s guidelines and promote the growth of the green bond market in India.

 

CONCLUDING THOUGHTS

The introduction of green bonds has opened up a beneficial route for funding sustainable initiatives. Nevertheless, concerns about “greenwashing” and the veracity of the “green” label have brought attention to the requirement for strong standards and controls. The recent suggestions by SEBI for green bonds in India are a positive step since they place a strong emphasis on accountability, openness, and the disclosure of critical information. However, by implementing a thorough green taxonomy, establishing a specific Green Investment Fund, developing specialised green bond exchanges, and offering tax advantages, additional advancements can be accomplished.

India can create a robust green bond market that successfully promotes sustainable development and contributes in addressing urgent environmental concerns by settling existing loopholes and putting innovative strategies into practice. Green bonds can be a key tool in directing money towards a greener and more sustainable future through transparency, accountability, and investor confidence.

 

( Pritha Lahiri & Varil Sheth are law undergraduate at Institute of Law, Nirma University, Ahmedabad. The author may be contacted via email at prithalahiri15@gmail.com & varilsheth.sheth@gmail.com).

Cite as: Pritha Lahiri  & Varil Seth, Towards Sustainable Finance: Strengthening the Credibility of Green Bonds, 2023, 28 August 2023) <https://rmlnlulawreview.com/2023/08/28/towards-sustainable-finance-strengthening-the-credibility-of-green-bonds/&gt; date of access.

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