The government’s ambitious renewable energy capacity target of 175 GW by 2022 is accompanied by an equally large demand for capital to finance these projects. According to the Climate Bonds Initiative (CBI), $189 million of additional capital will be needed during the period 2016 to 2022 to achieve this goal. Therefore, funds will need to be raised from diverse sources across continents.
The popularity of green bonds as a means to raise funds for renewable energy projects has been growing ever since the issue of the first Indian green bond in 2015. Green bonds differ from regular bonds in that the funds raised are earmarked for environment-friendly investments such as renewable energy generation and carbon emission reduction. Further, they can be labelled to specify which projects these funds will be utilised for.
The Indian green bonds market is having a good run as they have been certified by external certifying parties. In 2016, four out of the seven bonds issued were certified by the CBI and one bond received a review from Sustainalytics. Further, in 2017, the bonds issued by both Indian Renewable Energy Development Agency (IREDA) and ReNew Power successfully obtained CBI certification. External party certification instils international investor confidence in the Indian green bond market.
In May 2017, following consultations with the finance, environment, and new and renewable energy ministries, the Securities and Exchange Board of India released the final version of its guidelines for the issuance and listing of green bond securities.
Tapping international markets
The relatively higher cost of debt in India as compared to Europe and the US, mainly on account of higher interest rates and unattractive terms, makes a strong case for domestic companies to explore foreign markets for investments. Of late, the majority of green bond issues by domestic companies have been international issuances. Green bonds issued internationally have mainly been in US dollars, with considerably larger ticket sizes than those issued in India. This has enabled Indian companies to diversify their debt sources and tap a larger capital base.
The average ticket size of the international issues was estimated at $437 million, significantly higher than the $75 million size of the Indian issues up to March 2017. International issuances have shorter tenors of five to seven years as compared to domestic issuances with tenors of three to ten years. In addition, the average coupon size for domestic issuances was significantly higher at 7.5 per cent, as compared to 4.7 per cent for international issuances. One of the reasons for this divergence is the currency risk associated with the Indian rupee.
The Power Finance Corporation (PFC) made its debut in the green bond market with a $400 million issue on the London Stock Exchange’s (LSE) International Securities Market (ISM) in November 2017. The bonds have a semi-annual coupon rate of 3.75 per cent and have been certified by the CBI. According to PFC, the proceeds from the 10-year green bonds will be invested in renewable energy and energy efficiency projects across the country. Eligible projects will be identified on the basis of PFC’s Green Bond Framework.
In December 2017, the Indian Railway Finance Corporation (IRFC) made its foray into the green bonds market with the issuance of $500 million in green bonds listed on the ISM. The 10-year green bonds have a semi-annual coupon of 3.835 per cent and a maturity date of December 13, 2027. The issue was subscribed 3.2 times and garnered investment interest from investors in Asia, Europe, the Middle East and offshore USA. The funds raised have been earmarked for eligible green dedicated freight and passenger transport projects. The bonds have received CBI certification. Meanwhile, IRFC’s Green Bond Framework has been verified by KPMG.
The way forward
With the government’s increasing focus on renewable energy adoption, green bonds are steadily becoming a mainstream source to finance projects. IRFC’s bond issue is the sixth green bond transaction on the LSE by an Indian issuer and the fourth on the ISM. Indian Railways is the third state-backed entity to seek global exposure by issuing a certified green bond in London. This IRFC green bond and the previous issuance from IREDA and PFC are a sign of the huge market opportunities for international investors in green energy, transport and infrastructure to meet the country’s intertwined climate, energy and development goals.
Garnering interest from domestic as well as international investors, the green bonds market is expected to grow considerably in the near future, thereby facilitating the growth of the renewable energy sector in the country.