Introduction
Green bonds, when employed properly, can become successful tools to raise money for climate-friendly projects and therefore countries can release further environmental assets on the market. Translating rhetoric, the government has indicated that it intends to support green finance and that will require addressing regulatory gaps and enhancing transparency across the bond issuance process. In light of this, evaluating the potential for greenwashing and the regulatory obstacles associated with Sovereign Green Bonds is critical to India’s climate goal.
Sovereign Green Bonds and India
The Sovereign Green Bond was introduced in India recently in the Union Budget of 2022-2023 by the Finance Minister of India to mobilize resources for green infrastructure, aimed at helping the country meet its climate commitment. The Indian government has looked at a number of options, including sovereign green bonds, to fund these lofty goals and assist with other environmental projects. In order to raise money for energy efficiency programmes, renewable energy projects, and other ecologically friendly projects, India may need to issue sovereign green bonds.
Top of Form
India’s Climate Commitments and NDC’s Vis a Vis Sovereign Green Bonds
Given its ambitious Nationally Determined Contributions (NDCs) under the Paris Agreement, India is demonstrating its commitment to both addressing climate change and achieving economic growth. As a powerful financial tool, sovereign green bonds help India get closer to meeting its climate targets by providing a route to sustainable development and raising money for environmentally friendly projects and infrastructure that is resilient to the climate.
By 2030, India aims to produce 40% of its total electricity from non-fossil fuel sources. But reaching this goal will cost a lot of money in infrastructure for renewable energy.
India’s attempts to mitigate climate change and promote sustainable development depend heavily on increasing energy efficiency. Sovereign green bonds have the potential to bolster investments in energy-efficient technology and infrastructure, resulting in several advantages like lower expenses, less energy usage, and decreased emissions. Green bonds, for example, can be used to fund initiatives to install smart grid systems, modernize industrial processes, and adapt buildings in order to increase energy efficiency across all industries. Additionally, green bonds can be used to fund the development of decentralised renewable energy systems like microgrids and rooftop solar panels, which can provide access to electricity in isolated and disadvantaged areas while lowering dependency on fossil fuels and emissions. Adaptation projects that can be financed with sovereign green bonds include projects that facilitate ecological farming and enhance water management systems as well as constructing infrastructure that is resilient to climate change. Such investments will help to safeguard livelihoods and ecosystems, while reducing communities’ vulnerability to climate disasters.
Potential Risk of Greenwashing in Sovereign Green Bonds
When businesses or organisations deceive consumers about their environmental or sustainability initiatives, it’s considered a deceptive marketing tactic.This practice is alarming because it undercuts sincere attempts to address urgent environmental concerns and misleads customers. Greenwashing is a problem that goes beyond simple dishonesty.
While the phenomenon of greenwashing to deceive investors or consumers is used mostly by corporations, there is much worry regarding the risk of greenwashing in case of sovereign green bonds too.
The absence of uniform rules and standards for identifying what qualifies as a “green” project is one of the main concerns with sovereign green bonds. Governments may issue green bonds for projects with negligible environmental benefits if there are no defined rules in place .This can be done to draw in investors even while they fail to produce significant environmental benefits. Also, with an absence of accountability and transparency in the allocation and administration of the monies raised in sovereign green bonds, the risk of greenwashing is further exacerbated.
Analysis of Existing Indian Framework and International Guidelines and Practice
Existing Indian Framework
In the present framework, the GoI defines the “green” sector and the procedure to guarantee that investments will be directed towards it. A Green Finance Working Committee (GFWC) is mentioned in the framework as a means of assessing and choosing a specific project. Under the advice of specialists, the concerned ministry will carry out the project’s preliminary assessment.
International Guidelines and Practice
In January 2014, the International Capital Market Association (ICMA) unveiled the Green Bond Principles, which form the basis for numerous contemporary green labels and significantly contributed to the subsequent growth of the market (ICMA 2014). Since then, there has been a notable expansion in the certified green bond market.
Most certification programmes follow the broad principles outlined in the “voluntary process guidelines” known as the ICMA Green Bond Principles. Prominent commercial financial firms brought them together under the ICMA’s aegis (ICMA 2015).
While the Green Bond Principles are rather general, the CBI’s Climate Bonds Standard specifies industry-specific qualification parameters to evaluate an asset’s low carbon value and suitability for issuance as a green bond. The Government of India received technical support from the World Bank’s Sustainable Finance and ESG Advisory Services in order to launch the sovereign green bond programme.
Dissection of SEBI Guidelines and Circular on Sovereign Green Bond and Green Washing
To address ambiguities in sovereign green bonds, SEBI issued a circular on February 6, 2023, outlining initial disclosure requirements. The Department of Economic Affairs also issued a framework detailing project evaluation and fund management processes. SEBI introduced additional guidelines on May 4, 2023, to strengthen measures against greenwashing. The circular emphasized disclosure requirements and transparency measures, holding stock exchanges accountable for monitoring updates. Despite SEBI’s efforts to regulate green bonds and combat greenwashing, there are several areas where loopholes persist like Lack of Specificity for Sovereign Green Bonds, Monitoring and Enforcement Challenges and Inadequate Verification of Green Credentials.
Suggestions to Further Solidify the Existing Framework
The growing global trend towards sustainable finance has accelerated the issuance of sovereign green bonds, which are now a crucial tool for funding green projects. In addition to drawing in eco-aware investors, these bonds give governments a strong instrument to carry out their promises to combat climate change and promote sustainable development.
A global reporting database for sovereign green bonds is important for building a robust system of these bonds. The database will provide a centralised spot for aggregating data, thereby improving the comprehensiveness of the information available about sovereign green bond issuance, impact, and UoP.
A new dedicated body overseeing the disbursement and subsequent use of proceeds (UoP) for sovereign green bonds could tremendously enhance the effectiveness of reporting. It would simplify the collection of data and verification processes, with unified reporting frameworks worldwide and common reporting standards, minimising new errors or discrepancies; and confirm the integrity and correctness of UoP reporting through frequent audits and reviews.
CICERO a widely recognised independent external review agency while reviewing the Indian framework on Sovereign Green Bonds, highlighted certain pitfalls in the model that included project selection criteria. The SPO is concerned that the framework would encourage investments in solid biomass, biofuels, and bioenergy plants that carry intrinsic dangers to the climate.
In order to address the deficiencies noted by CICERO in India’s Sovereign Green Bond framework, a deliberate reorganisation of project assessment and selection standards is necessary. Clearer rules with defined cutoff points can mitigate funding for harmful projects. In the present state, we can see that more than three quarters of issuers provide some form of impact reporting. However, there is little uniformity, as there are more than 200 metrics which are being reported.
Only 15% of reporting aligns with an established impact reporting framework, such as the IFI Harmonized Framework or the Nordic Public Sector Issuers Position Paper. A better impact reporting system can be established and this issue can be addressed by taking a few crucial actions. Adopting globally recognised standards or criteria for impact reporting, such as the Nordic Public Sector Issuers Position Paper or the IFI Harmonised Framework, is crucial. These frameworks offer standardised methods for calculating and disclosing environmental effects, such as CO2 and greenhouse gas (GHG) emissions.
Moreover, a standard metric also needs to be applied for reporting CO2 and other GHG emissions. This can be implemented by adopting standards and procedures for reporting emissions set by the Intergovernmental Panel on Climate Change (IPCC), such as the Greenhouse Gas Protocol. A standard metric can enable comparative assessment of environmental outcomes across different projects and jurisdictions. Second, increased transparency and disclosure requirements can promote assurance – that is, issuers should provide relevant and adequate information on environmental outcomes of their project. Third, programmes for technical assistance and capacity development can be provided to help issuers implement best practices for impact reporting. Improving the impact reporting mechanism in sovereign green bond programmes would increase the transparency, comparability and reliability of their environmental reporting processes, and bring their reporting in alignment with international standards. This could enhance the trust of investors, improve informed decision-making, and incentivise more funding into projects and programmes with demonstrated environmental benefits.
Conclusion
Sovereign Green Bonds (SGBs) are a step in the right direction toward making the system of finance more sustainable, but a careful analysis of the potential for greenwashing, along with consideration of the legal complexities in dealing with SGB, is necessary as India tries to negotiate its commitments in trade, and in dealing with climate change. These actions reflect an effort to progressively incorporate sustainable finance into the economy of India. But the noticeable lack of standardised criteria and lax enforcement procedures create a system where even sophisticated participants could, at best, claim that they are following the rules, if not actually doing serious harm by interrogating the process through which these programmes are designed.
The frameworks for sustainable finance on a global scale, such as the Green Bond Principles (GBP) and Climate Bonds Initiative (CBI) are helpful in providing directions to stakeholders. But without standardisation, commerce across borders remains stymied. To sum things up, despite SGBs’ potential in fuelling India’s sustainable development, it is imperative to overcome barriers and other concerns such as greenwashing.
This blog is written by Oshin Beniwal and Devesh Pratap Mall, Fourth year Law student at National Law University Jodhpur.