India is poised to become the first of the BRICS emerging economies to enter the sovereign green bond market after announcing that it will issue the product in the new financial year. Brazil and Russia are on the way too, though sanctions and the threat of war in Ukraine will keep international buyers away from the latter name.
India’s issue or issues will fund green infrastructure and form part of the government’s record Rs14.95trn (US$200bn) 2022–23 borrowing programme, finance minister Nirmala Sitharaman said. "The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy,” she said.
The announcement builds on India’s 2070 net-zero carbon emissions target and its intention of constructing 500 gigawatts of renewable energy capacity by 2030, which it outlined during November’s COP26 climate conference.
With the BRICS having been laggards in the product despite their significance for global decarbonisation and, in some cases, well developed domestic green bond markets, India’s first mover status won plaudits. “It’s an excellent move and will serve to highlight the climate policy achievements of the Indian government with its massive growth in renewables,” said Sean Kidney, CEO of Climate Bonds Initiative. “It will allow international investors to support those efforts and help grow a domestic market by providing liquidity and benchmark pricing.”
Namita Vikas, managing director at auctusESG, agreed. “This is a very significant move by the government," she said. Vikas led the Indian market’s first green bond in 2015 as chief sustainability officer at Yes Bank.
Besides providing liquidity for the country’s energy transition, she expects the sovereign deal to “further validate the [Indian] green bond market, leading to stronger bids, larger order books, [better] pricing and leverage and higher quality of the investor base”.
The announcement certainly chimes with India’s increasing focus on ESG themes. It "fits into a broader regulatory push towards ESG compliance for corporates and driving awareness about green investing", said R Sivakumar, head of fixed income at Axis Mutual Fund.
Details such as timing, size, distribution method and the plans for repeat issues and a green yield curve are still uncertain. No green structuring adviser or second-party opinion provider has been announced yet, though sources note that New Delhi strongly favours its own public-sector banks. Some expect State Bank of India, the largest of these and a significant green issuer, to play a key role.
Since the government has said the issue will form part of its borrowing programme and India is not an active issuer internationally, "it increases the likelihood of these being rupee securities, either in the domestic market or Masala bond structure", said Radhika Rao, senior economist at DBS.
Earlier plans for India to issue conventional US dollar bonds were shelved after arousing controversy.
The issue is most likely to be auctioned if it is part of the government borrowing programme, Sivakumar added.
The programme’s new record size, the announcement of which drove the 10-year benchmark yield up 18bp to 6.88%, means that the sovereign needs to broaden its investor base by accessing new buyers such as ESG funds. "Since the Reserve Bank of India is unlikely to step in to buy the government securities like it did in the last two years, India needs to tap into a new investor base like foreign portfolio investors," said Arvind Chari, chief investment officer at Quantum Advisors India.
Investors had also hoped for clarity on a proposed rationalisation of capital gains tax to pave the way for Indian government bonds to become Euroclearable and included in global bond indices. Although the budget gave no such indication, plans could be announced in the coming weeks, according to Rao.
Of the other BRICS states, Russia is known to be investigating sovereign green bonds too. However, international sanctions, which conflict in Ukraine could intensify, and human rights concerns may limit investor appetite outside the country.
Brazil is also considering entering the market. “Brazil is working on it,” said one market source.
It remains unclear whether the Latin American sovereign – an active name in international bond markets that last issued in June – would favour a domestic or offshore offering.
Although China’s domestic green bond market has seen very significant growth and ranks as the world’s second largest, the People’s Republic has yet to issue green bonds. However, Climate Bonds Initiative anticipates it entering the market too.
“A China sovereign green bond is expected to be released,” the NGO said last September when launching its latest report on the Chinese market with China Central Depository & Clearing Research Centre.
CBI has also urged South Africa to issue. “A South African green sovereign would send a strong signal to the capital markets that South Africa is preparing to meet the goals of the Paris Agreement,” it said last August.
The country moved its energy transition forward significantly at COP26 with an US$8.5bn agreement to phase out coal-fired electricity generation.
Its major cities of Cape Town and Johannesburg have both issued green bonds. The sovereign is another active name in international markets, last issuing a jumbo US$5bn two-parter in 2019.
Corrected story: Corrects quote attribution in second paragraph