India to hold off on green bonds sale

The earlier plans to issue ₹15,000-16,000 crore in green bonds during the second half of FY24 have been put on hold.

“Green bonds haven’t provided any benefits yet. What is the point of issuing green bonds with so many conditions if it costs the same as other bonds," the person said. “The companies, which have claimed to want to invest in green bonds, are not willing to make sacrifices on the yield front. We should see some yield benefits for the issue of green bonds. But, this is not the case."

The sustainability-linked bond market has experienced a slowdown amid rising interest rates globally, leading to a decline in the issuance of debt for climate projects. The weakness in climate funding marks a shift from past years when governments and companies raised funds for green initiatives at attractive rates.

The official said if conventional bonds yield 7-7.2%, green bonds should be at a discount and shouldn’t have over 6.8% yield for it to be feasible. The yield on the Indian 10-year government bond eased to 7.197% on 24 August after reaching a four-month high of 7.249% on 17 August.

“Green bonds are a nice concept, but until investors start showing that they prefer green bonds, the concept is still a concept," the person said. “If you really are an ESG (environmental, social and corporate) investor as you claim to be, you should prefer to invest in green bonds. However, this hasn’t been the case," the person added.

A finance ministry spokesperson didn’t respond to queries.

Earlier, the government planned to sell sovereign green bonds for the second consecutive year to fund investments in solar, wind, hydropower and other projects that mitigate the impact of carbon emissions, Mint reported in February.

The proposed sale of green bonds during FY24 was to follow a similar issuance during the previous fiscal.

The first tranche of green bonds worth ₹8,000 crore was sold in January, while the second auction of another ₹8,000 crore was held in February.

Interestingly, though this fiscal’s annual budget proposed a record market borrowing of ₹15.43 trillion, it has not separately announced a sale of green bonds.

The funds raised by selling green bonds can’t be utilized for projects related to fossil fuel extraction, production, distribution, or nuclear power. However, they can be used for government investments, subsidies, grants-in-aid, tax foregone, or operational expenses to support climate mitigation and sustainable green initiatives to reduce carbon intensity.

The sovereign green bonds were also expected to set the benchmark for private-sector fundraising through ESG-linked rupee bonds. The successful placement of government bonds would allow companies to secure funding for their green initiatives at competitive rates.

Unless the government gives some incentives to investors (to invest in green bonds), like higher yields or tax breaks, investors are unlikely to make investments in green bonds as they don’t have much to gain from it, said Madan Sabnavis, chief economist at Bank of Baroda.

“Everybody (investors) is looking for better returns or tangible benefits. At its current form, green bonds are not attractive for investors. Also, India currently doesn’t have a system in place to evaluate green projects and administer and monitor them. So, green bonds will find takers only at higher yields," Sabnavis added.