India targets record green bond issuance by 2022

India’s green bond issuance is set to hit a new record high in 2022, after an exceptionally strong 2021.

Private and bank issuers in India are expected to more actively tap the climate-related debt market, as the world’s third-largest emitter of carbon dioxide will need $ 10 trillion to be carbon neutral by 2070, said experts. More and more issuers will also look to the offshore market, where there is a larger and broader pool of climate-conscious investors.

India issued $ 6.11 billion in green bonds in the first 11 months of 2021, according to the UK green bond monitoring agency Climate Bonds Initiative. It was the strongest year since the country’s green bonds were first issued in 2015.

“We expect 2022 to be another bumper year for issuing these bonds as Indian companies become increasingly aware of their carbon footprint,” said Nidhi Sharma, director of strategy and products at investment at LC Capital India, an investment management company.

Banks are likely to step up green debt issuance to fund their growing lending program to accelerate India’s energy transition, said Sivananth Ramachandran, director of capital markets policy, India, CFA Institute. In the first 11 months of 2021, 94% of green bonds were issued by non-financial companies, according to the Climate Bonds Initiative.

“With a large portion of lending still dominated by banks, and with pressure on banks to accelerate lending to sustainable projects, it may be just a matter of time before more of them become. active issuers of green bonds, ”said Ramachandran.

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Foreign investors

More Indian issuers will look to the offshore bond market for access to a larger and deeper pool of capital outside of their home country, experts have said.

“While onshore green financing in India has grown significantly from its humble beginnings in 2004, net zero financing for the world’s third largest emissions contributor will require access to the vast pool of capital that exists offshore. coasts, ”said Mitch Reznick, head of sustainable fixed income at Federated Hermes, a US-based investment manager.

Green bonds issued by emerging markets such as India have a strong appeal to foreign investors, due to their relatively attractive valuation and decent economic growth prospects, Reznick added.

According to a Nov. 18 report from the Council on Energy, Environment and Water Center for Energy Finance, or CEEW-CEF, an Indian think tank.

The CEEW-CEF estimated that India will have to invest 10 103 billion dollars by 2070 to be carbon neutral. According to the think tank, around $ 8.412 billion will be needed to transform India’s coal-based energy sector into renewable energy sources, while an additional $ 1.494 billion will be needed to develop capture and storage technology. carbon and green hydrogen.

“The cumulative investments required for net zero companies may be larger than the current size of the Indian economy. Consequently, their financing needs should be insufficient ” noted Jay Lee, Hong Kong-based partner at Simmons & Simmons, a law firm. India’s nominal GDP was $ 2.66 trillion in 2020.

“To fill this gap, the country will need investments from developed economies in the form of concessional financing as well as an injection of private capital from foreign investors in the form of investments in bonds and equities”, said Prachurjya Bharaly, associate director, investment banking at Acuity Knowledge Partners, a research and analysis firm.

Increase in rates, costs

While low borrowing costs were the driving force behind India’s strong green bond issuance in 2021, the momentum to go green will likely offset some of the impact of rising interest rates in India. the near future.

“If the increases are at moderate levels, they may not significantly affect the growing issuance of green bonds, as the interests of issuers, intermediaries and investors in green bonds may be greater than the effect. negative moderate level increases “, said Simmons Lee.

In addition, more financial incentives from the Indian government will also be crucial in accelerating the growth of the country’s green bond market, analysts said.

“These stimuli can take the form of government grants to partially or fully cover external review costs, credit scoring costs and other costs associated with issuing green bonds or a tax deduction for fees. emission, ”said Bharaly of Acuity.

For example, regulators in other markets such as Hong Kong and Singapore fully reimburse issuers for external reviews if they meet the government’s criteria, said LC Capital’s Sharma. “Such strategies could be followed in India, which could make them more attractive to investors,” Sharma added.

“Unlike China, which has increased its green bonds and funding steadily over seven to eight years, India appears to be lagging behind in significant green bond growth. Corn, [2021] seems to be showing good growth momentum, ”said Lee.

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