India has always put much emphasis on protecting the environment and developing various laws, regulations, and provisions to protect nature’s beauty. The country saw first-hand wastage and pollution of nature-waters, air, and various other exploitation of energy-resources, issues of sustainability, and whatever else these might be. Resource exploitation today is one common issue globally including other possible issues in the present-day India.
One very good example of resource exploitation is with respect to the crude oil. The importation of crude oil from Arab countries necessitating a huge inflow of investment and leading to price instability on a per-litre basis will definitely tie the price of crude oil during the process. To counter this problem, electronic vehicles came into being. Among others, Tesla Motors, a Californian Motor Manufacturing company, started the development of electronic vehicles since 2004 and further delivered to the public in 2008.[1]
One of the world’s leading car manufacturers, also Mercedes-Benz is developing EV, which was launched in 2016 in Paris. And Mercedes-Benz and other automobile manufacturers are putting up efforts toward sustainability and energy conservation. But there is also a continuous argument about whether or not financing exists in the financial market for such sustainable developments.[2]
To put in short, the financial backing for environment-friendly projects is done by Green Financing. The term encompasses financial instruments to raise capital for environment friendly and sustainable development projects. Some common instruments include- green loans, green bonds etc.
In this article, we shall chiefly focus on one such concept-Green Bonds and Green Deposits, and their regulation in India through The Security and Foundational Board.[3]To understand Green Bond and thereafter go to the regulation of Green Bonds by the Security Exchange Board of India
Green Bonds are a type of investment in a fixed rare to fund projects which are working towards sustainability, thereby showcasing positive environmental impact. The main difference between Green Bonds and Traditional Bonds is while in case of Green Bonds the proceeds from the issue are used towards the development of projects which sustain environmental impact; in case of Traditional Bonds the proceeds are used for varied other purposes depending upon the objects of the financial enterprise figuring the bond.
This being said, the issuance of Green Bonds has to face long-drawn-out and very complex processes owing to the potential for misrepresentation of facts. The Security and Exchange Board of India under Green bond guidelines in 2017 has outlined specific standards for the categorization of companies who will be eligible to apply for Green Bonds.[4]
The Following are as follows:-
• Renewable and Sustainable Energy: Renewable energy resources such as wind, solar etc.
• Clean Transportation ( mass Transportation)
• Sustainable waste management ( Clean and / or drinking water, water recycling etc),
• Climate Change Adaptation
• Energy Efficiency ( efficient and green buildings )
• Sustainable waste management ( Recycling, Waste to energy etc)
• Sustainable Land Use ( Including sustainable forestry and agriculture, afforestation etc)
• Biodiversity Conservation
The above mentioned were the categories of eligible issuance of Green Bonds. There is a possibility of more being added by the Security and Exchange Board of India based on future situations emerging. Other major advantage of Green Bonds is tax exemption from Tax and tax credits because Green Bonds are helping promote sustainability projects. They will also enjoy some incentives, making them another bidding option for Green Finance. This Green Finance can be issued by any Public, Private, and Multilateral Company. Thus any company can raise capital for the development of any other sustainable project.[5]
The main target for the introduction of Green Bonds by the Security and Exchange Board of India, as laid down in their Disclosure requirements, is to serve India’s Intended Nationally Determined Contributions) toward climate improvement and the mitigation of carbon pathways for the future. Investment in Green Ventures has lately emerged very popular and consequential in the capital buildup. This sort of capital will be an incentive to the ESG Goals (Environmental, Social, and governance). Ample opportunities to focus funds on injury projects will be available for the issuer to attract investors to raise funds . [6]
India’s Green Bond Categories :-
Sovereign Green Bonds:
• Issued by sovereign authorities or tax-beneficial bonds.
• Good for funding working capital and longer-dated projects.
Hybrid Bonds (Covered Bonds):
• Bondholders have recourse against the issuer’s assets or against the issuer itself.
• Raising money for environmentally friendly projects.
Asset-Backed Securities:
• Green bonds secured by the issuance of an asset.
• Cash flows through debts.[7]
The major benefit for issuers is that they can avail cheaper credit by providing support for sustainable goals that are relevant to investors. In contrast, there has been a plethora of reasons for the shortage in issuance of Green Bonds-due to the lack of regulations and awareness, the high cost of issuance, and a loss of investor confidence in investing, among others. Investing in projects for sustainability purposes has always posed challenges since one cannot expect great returns in the nascent stage of business. It usually takes a long period of time to get established within the society, which is mainly the reason that’s pulling down green finance, in turn, as a whole. With high issuance costs, start-ups focusing on sustainability projects will have a very hard time in issuing the green bonds.
Although green bonds carry both advantages and disadvantages, it is likely to be considered an excellent means for sustainable development projects; however, depending on the nature of the regulation, this process may be made more useful and efficient. These include the possibility of providing fiscal incentives on green bond issuance, subsidizing other costs, and providing many other incentives, enhancing the value of green bond issuance and its impact on establishing an environmentally sound society. [8]
In India, the Security and Exchange Board of India instituted guidelines for issuing Green Deposits. Just like traditional fixed deposits which are always considered safe options for receiving a fixed investment return, green deposits focus on sustainability. Regarding fixed deposits, there is a standard fixed income return you will receive. In case of Green Deposits, those returns shall be used as capital for developing projects that positively impact the environment. These may also include sustainable farming and projects that reduce the carbon footprint overall.
Recently, the Reserve Bank of India came out with a framework for the acceptance of green deposits. The framework specifies that the fund raised from green deposits shall be used to lend money for developing projects that shall have a primary focus on sustainable development. It also lists what projects are not eligible, such as nuclear power projects and projects related to landfills. The Security and Exchange Board of India gave out related guidelines in 2017 for the issuance of Green Deposits. Within the presented framework, the scope of Green Debt Securities was to include Blue bonds to be raised for water management, yellow bonds for the purpose of solar power generation, and transition bonds.
Both the frameworks issued by SEBI and the Reserve Bank of India neatly tackle the concern of Green-washing. With third-party verification being introduced as a means to address green-washing, the whole premise is centered around examining through third-party scrutiny both the fund provision for the project and the monitoring of projects being funded for their sustainable development.
Despite these guidelines and frameworks adopted by the Security and Exchange Board of India, the real fact exists that there is insufficient awareness and support for promoting sustainability development projects. These instruments for financing could do wonders for establishing great green finance as another option in capital raising. Green Finance also presents a handful of advantages altogether. Therefore, SEBI and the Reserve Bank of India should think of making the framework more viable for small-scale environment-friendly projects. With these various incentives in place, investors would be encouraged to participate and engage in the green financial instruments that can make the way to a brighter future.[9]
REFERENCES
1.Securities and Exchange Board of India (SEBI) Green Bond Guidelines, 2017
2.Reserve Bank of India (RBI) Framework for Acceptance of Green Deposits
3.India’s Intended Nationally Determined Contributions (INDCs)
4.SEBI’s Disclosure Requirements for Green Bonds
5.Tesla Motors’ development of electronic vehicles (2004-2008)
6.Mercedes-Benz’s launch of electric vehicles at the 2016 Paris Motor Show
[1] NEXT IAS Team, Environmental Laws in India: A Complete Guide for UPSC, (Aug. 29, 2024), https://www.nextias.com/blog/environmental-laws-india/ (last visited Feb 13, 2025).
[2] Mercedes-Benz at “Mondial de l’Automobile 2016,” MBUSA Newsroom (2016), http://media.mbusa.com/releases/mercedes-benz-at-mondial-de-l-automobile-2016 (last visited Feb 13, 2025).
[3] Green Finance – Meaning, Objectives & Climate Financing for UPSC, Testbook, https://testbook.com/ias-preparation/green-finance (last visited Feb 13, 2025).
[4]Green Bond, Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/esg/green-bond/ (last visited Feb 13, 2025).
[5] Hardik Bhatia, Green Bonds vs Traditional Bonds: Understanding Key Differences, Sustvest Blog (Oct. 18, 2024), https://blog.sustvest.com/green-bonds-vs-traditional-bonds/ (last visited Feb 13, 2025).
[6]Disclosure Requirements for Issuance and Listing of Green Debt Securities, azb, https://www.azbpartners.com/bank/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities/ (last visited Feb 13, 2025).
[7] Explore How Green Bonds Can Drive Sustainable Growth in India., https://www.gripinvest.in/blog/green-bonds-in-india (last visited Feb 13, 2025).
[8] Pros and Cons of Investing in Green Bonds, https://smartasset.com/investing/are-green-bonds-a-good-investment (last visited Feb 13, 2025).
[9] SEBI | Green Debt Securities, https://www.sebi.gov.in/statistics/greenbonds.html (last visited Feb 13, 2025).
Author: Dhanya.K.S student at CHRIST(Deemed to be University), Pune Lavasa.
