During this year’s COP26 summit in Glasgow, the Indian prime minister, Narendra Modi, pledged that India would cut its emissions to net zero by 2070, and that by 2030 it would: increase non-fossil fuel energy capacity to 500 GW; meet 50 per cent of energy requirement from renewable energy; reduce total projected carbon emissions by 1 billion tonnes; and reduce the carbon intensity of the economy by 45 per cent. Considering that India is the third biggest greenhouse gas emitter behind the United States and China, this is a significant step both globally and for India itself.

India’s history with green finance has been short, but action-packed. The Climate Change Finance Unit was formed in 2011 within the Ministry of Finance as a coordinating agency for the various institutions responsible for green finance in India. Since 2012, the Security and Exchange Board of India (SEBI) has implemented sustainability disclosure requirements for the top 100 listed entities based on market capitalisation at the Bombay Stock Exchange and National Stock Exchange. In May 2017, SEBI issued a circular setting out disclosure requirements for the issuance of green bonds (the Circular). The Circular provided an expansive definition of green bonds. SEBI states that a green bond is like any other bond where a debt instrument is issued by an issuer for fund raising, except that the proceeds of a green bond are earmarked for the financing of green projects. Furthermore it recognises a variety of categories as green projects, including renewable and sustainable energy (wind, solar, etc.), energy efficiency (e.g., efficient and green buildings) and biodiversity conservation.

In order for India to meet its climate commitments, it will need significant financing to support the relevant sectors. India’s energy sector is one of the country’s fastest growing sectors and neither government financing, nor purely local investment will be enough to support this growth. To meet the 1.5ºC target set by the Paris Climate Agreement, on its path to becoming a US$5 trillion economy, India will require massive investments in green technologies and infrastructure, estimated at US$200 billion annually for infrastructure alone. How and where India will source green financing are therefore vital questions in any discussion.

Although India is new to the party, it is the second largest emerging market for green bonds, with its first green bond having been launched in 2015 by Yes Bank Limited to raise INR 5 billion to enhance long-term resources for the funding of renewable and clean energy projects. As of February 2020 Indian entities have issued US$16.3 billion in green bonds. Although India has made strides with green bonds, the US$16.3 billion only represents 0.7 per cent of all bonds issued in the India financial market. Despite the small percentage of green bonds, there have been noteworthy deals.

In April 2021, State Bank of India listed US$100 million worth of green bonds on India’s INX’s Global Securities Market Green Platform. This followed its earlier green bond issuance of US$650 million in September 2018. In April 2021, ReNew Power, India’s leading renewable energy company, issued US$585 million senior secured green bonds.

In terms of wider corporate activity, earlier this year, Adani Green Energy acquired the SoftBank-backed SB Energy Limited for approximately US$3.5 billion. Strategically, this allowed Adani to achieve its targeted renewable portfolio of 25 GW four years ahead of schedule. This deal has been a prime example of competitors in the market jockeying to ramp up renewable capacity. Whilst the issuing of green bonds is a popular choice for green financing, it is not without its challenges. The cost of issuing green bonds is currently higher than issuing other bonds. It has been noted that the average coupon rate for maturities between five and 10 years remained generally higher for green bonds than for corporate and government bonds. It is believed that creating a better information reporting system may reduce maturity mismatches, borrowing costs and the perception of green finance being high-risk.

An additional challenge is greenwashing: generally exaggerated and/or misleading claims that suggest a company or country is making environmentally friendly decisions when they are not. Given that India does not have any dedicated legislation governing the issuance of green bonds, the Circular is the go-to guidance on green bonds. Under the Circular, an issuer may appoint an independent third party to review the issuer’s process; however this is not a requirement and therefore greenwashing remains a significant risk.

It is clear that green financing is on the rise in India and will be crucial if India is to reach its climate targets. To address the challenges facing green financing, India will need to improve its information management and may need to consider defining green finance and putting into place laws governing the issuance of green bonds. This may drive down coupon rates, however, which may affect investor demand. In many ways India is a test case and reducing the perception of green finance being high risk could increase the amount of domestic and foreign investment into climate focused projects in the country.

The road ahead for Indian green energy projects is bright, but consistent focus over several decades will be needed to bring these projects to fruition. The announcement at COP26 represents the start of a race to get India more reliant on green energy by 2030. Green financing will be critical to the outcome.

The Reed Smith team have advised a variety of lenders on green finance projects in India. If you are interested in learning more about Reed Smith’s India finance capabilities, please visit our India page or contact Gautam Bhattacharyya, Sarah Caldwell or Nathan Menon.