MOBILIZING CAPITAL MARKET TO FINANCE CLIMATE AND DEVELOPMENT GOALS IN

THE LIGHT O GREEN DEBT SECURITY IN INDIA

9.4 (OPTIONAL PAPER)- SECURITIES AND INVESTMENT LAWS

SUBMITTED BY-
SOURABH RAJPUROHIT
UID NO.: UG19-106
B.A.LL.B. (HONS.)
YEAR: V SEMESTER: IX

SUBMITTED TO-
SHRUTI VIJAY VAGHELA (ASSISTANT PROFESSOR OF LAW)

JUNE, 2023
MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

1
 TABLE OF CONTENTS

CHAPTER I.................................................................................................................................3

INTRODUCTION......................................................................................................................................................... 3

1.1 AIM.................................................................................................................................................................... 4

1.2 OBJECTIVE..................................................................................................................................................... 4

1.3 RESEARCH QUESTIONS............................................................................................................................. 4

1.4 REVIEW OF LITERATURE........................................................................................................................ 4

1.5 RESEARCH METHODOLOGY................................................................................................................... 4

CHAPTER II................................................................................................................................................................ 5

GREEN DEBT SECURITIES IN THE INDIAN CONTEXT............................................................................... 5

2.1 DISCLOSURE BY THE COMPANY (MANDATED DISCLOSURES)......................................5

2.2 DISCLOSURE BY THE COMPANY (CONTINUOS DISCLOSURES)......................................6

2.3 OBLIGATION OF THE ISSUER................................................................................................................. 6

2.4 ESG AND SUSTAINABILITY REGULATION......................................................................................... 7

CHAPTER III............................................................................................................................................................... 8

3.1 INTERNATIONAL GUIDELINES- THE ICMA GREEN BOND PRINCIPLES.................................8

3.2 THE EUROPEAN UNION (EU) FRAMEWORK..................................................................................... 8

3.3 ANALYSIS OF GREEN DEBT SECURITIES IN INDIA..................................................................... 10

CHAPTER IV............................................................................................................................................................. 14

4.1 ISSUES AND CHALLENGES.................................................................................................................... 14

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CHAPTER V..............................................................................................................................16

5.1 CONCLUSION AND SUGGESTIONS......................................................................................................... 16

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CHAPTER I
INTRODUCTION
Global temperatures have been increasing at an alarming pace, surpassing those of the last
previous multi-century warm episode, which occurred around 6500 years ago, between 2011
and 2020. The Report prepared by the Intergovernmental plan on Climate Change has only
served to emphasise how vital it is to take firm action right now in order to slow down
climate change and transition to sustainable lifestyles. 1 In the recent times, the issues
surrounding the climate changes have arisen significantly and there has to be some steps to
taken from every industry and the Financial Markets/Capital Markets being one of the major
industry in such a way has come up with the mode of Green Finance/Green Bonds. Further,
such Green finance has gained popularity as a consequence of the growing awareness
regarding environmental degradation. International Capital Market Association (“ICMA”) 2
describes Green bonds as any sort of instrument whose revenues are then used fund or re-
finance, new or existing green projects, As an alternative, a green project will be financed
with an amount equal to the bond amount. Green bonds are a component of the green finance
framework that aid in financing investments with observable environmental advantages to
promote ecologically sustainable growth. By supporting sustainable initiatives, green finance
seeks to “internalise environmental externalities” and “modify risk perceptions”. The green
debt/bond market has been in a boom in India3, with businesses and financial institutions
raising ever-larger sums via this instrument for instance, a record-breaking USD 3.6 billion
has been raised for renewable energy projects in only the first half of 2021.4

In view of the pressing need to take decisive action to combat the mammoth of
climate change, green debt/bonds has grown in popularity. This research project starts out by
what does such green debt securities mean in the Indian context and then emphasises the
international standards for the issuance of green bonds. Before focusing on the legal
framework for green bonds in India, it analyses the identical legislation in the EU. The
paper then focuses on the

1
“The Intergovenmental Panel on Climate Change”, accessible at:
https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf , at 10.
2
“The Intergovernmental Panel on Climate Change”, accessible at:
https://www.ipcc.ch/report/ar6/wg1/#FullReport. (Last Accessed 11/11/22)
3
Saurabh Trivedi, “Green bonds are driving cost-effective finance to clean energy in India”, POWER
ENGINEERING INT’L, https://www.powerengineeringint.com/renewables/green-bonds-are-driving-cost-
effective-finance-to-clean-energy-in-india/ , Aug. 23, 2021 (Last accessed 08/11/22).

3
4
“Green bonds help projects net ₹26,300 cr.”, T HE HINDU https://www.thehindu.com/business/green-bonds-
help-projects-net-26300-r/article35988773.ece, Aug. 19, 2021 (Last accessed 08/11/22)

4
main problems and difficulties that this market has encountered in India before offering
recommendations for tightening regulation there in order to fully reap the benefits of such a
tool. This research project in conclusion gives out suggestion which if applied would
strengthen the regulation of green debt securities in India and the benefits of such instrument
would be best reaped.

1.1 AIM
The aim of this research project is to study and critically analyse the Green Debt Securities in
India and the issues and challenges which the legislative department in facing in its regulation
and implementation.

1.2 OBJECTIVE
The objective behind this research project is to study and understand the Green Debt
Securities in India and the issues and challenges which India in its regulation.

1.3 RESEARCH QUESTIONS

a) What are Green Debt Securities?
b) What are the International best practices and how can that be applied in the Indian
Context?
c) What are the issues and challenges which India is currently facing in its Implementation?

1.4 REVIEW OF LITERATURE

For the purposes of this project, the researcher took the aid of journal articles, books as well
as online resources. The articles found in google search, RBI website, SEBI website,
Working papers, Discussion papers, International guidelines, etc., which were referred to
were erudite, highly expansive and detailed and helped in providing appropriately succinct
information regarding a position of law. The researcher also referred various unofficial
websites and blogs to spur the thought process which ultimately aided the analysis. The
primary source used to take out the research material was the internet and the material found
therein was used extensively. Most of the material referred to was properly explained, and
concise. It was easy to understand and went a long way towards the completion of this
project.

1.5 RESEARCH METHODOLOGY

The research methodology used by the researcher is the doctrinal method of research as the
paper was developed after referencing several books, scholarly articles and internet resources.

5
The researcher has divided the project into four chapters, namely introduction, international

6
best practices, issues and challenges and suggestions and conclusion. These chapters are
further divided into sub-chapters for clarity. In these chapters, the researcher has studied and
relied on various authentic internet sources to devise the policy implications and the suggest
some solutions.

CHAPTER II
GREEN DEBT SECURITIES IN THE INDIAN CONTEXT
The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“SEBI ILDS
Regulations”) regulate the public offering of debt securities and their listing on a recognized
stock exchange, whether they were issued via a public offering or a private placement. In
addition to the conditions set out in the ILDS Regulations and Circulars, the following are
also deemed to be applicable for the public issuance and listing of Green Debt Securities as
well as the listing of Green Debt Securities that have been privately placed. If the money
collected via the issue of the debt securities is to be used for project(s) and/or asset(s) falling
within any of the following general categories, the debt security will be deemed “Green or
Green Debt Securities”:
a) Clean and sustainable transportation which may also include any public transportation.
b) Water Management in a rather sustainable way, including clean/drinking water, recycling.
c) Any adaption made for the climate change.
d) Attaining energy efficiency i.e., green building.
e) Waste management is sustainable manner which includes recycling of waste, conversion
of waste to energy, efficient disposal etc.

2.1 DISCLOSURE BY THE COMPANY (MANDATED DISCLOSURES)

The issuer of a Green Debt Securities shall make following disclosures:
 A statement outlining the environmental goals of the issuing of green debt securities;
 A brief explanation of the decision-making process the issuer has used or will use to
decide which project(s) and/or asset(s) qualify for the revenues generated via the issuance
of green debt securities. An example of the information that must be provided is as
follows: the method used or to be used to determine how the project(s) and/or asset(s) fit
within the categories of eligible green projects; the requirements that make the project(s)
and/or asset(s) eligible for using the proceeds from the Green Debt Securities; and the
proposed green investment’s environmental sustainability goals.
 The issuer must give information on the system(s) or processes to be used for monitoring
the distribution of the issue’s proceeds.
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 Information on the projects, assets, or other places in which the issuer plans to invest the
proceeds from the sale of green debt securities, including any plans to refinance already-
existing green projects, assets, or areas.
 The issuer has the option of designating an impartial third party to assess and verify
various procedures, such as the criteria for project appraisal and selection, the project
categories that qualify for funding via green debt securities, etc. This appointment must
be specified in the offer document and is optional.

2.2 DISCLOSURE BY THE COMPANY (CONTINUOS DISCLOSURES)

The following disclosures must be provided by an issuer along with its annual report and
financial results if it has listed its green debt securities and complied with all requirements of
the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
 Information on how the issue’s proceeds were used and how much money was left over
was reported in the offer document and disclosure document. Along with the quarterly
and annual financial results, these specifics will be disclosed. The internal tracking
system and the distribution of money to the project(s) and/or asset(s) from the proceeds of
Green Debt Securities, however, should be confirmed by the report of an external auditor.
 Additional disclosures that must be included in the annual report include: a list of the
project(s) and/or asset(s) that the revenues from the green debt securities have been
invested in, together with a short explanation of each one and the sums paid out.
However, information must be provided regarding the categories into which such projects
and/or assets fit in cases where confidentiality agreements restrict the amount of
information that may be shared about individual projects and/or assets.
 Qualitative performance indicators and, where possible, quantitative performance metrics
of the assets or project’s environmental effect(s). If the quantifiable benefits or effect
cannot be determined, the abovementioned fact may be adequately communicated
together with the explanations for the lack of environmental benefits or impact.
 The procedures and main underlying hypotheses utilized to create the performance
indicators and metrics.

2.3 OBLIGATION OF THE ISSUER

An issuer of Green Debt Securities shall :
 Continue to employ a decision-making process to decide if the project(s) and/or asset are
still eligible (s). This includes, without restriction, a description of the environmental
goals
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 of the green debt securities and a method for figuring out whether the project(s) and/or
asset(s) in question are eligible.
 Ensure that all assets and projects supported with money from green debt securities
satisfy the stated goals of such securities.
 Use the money solely for what is specified in the offer agreement as the declared objective.

If an issuer of Green Debt Securities or any agent appointed by the issuer follows any
globally accepted standard(s) for the issuance of Green Debt Securities, such as measuring
the environmental impact, identifying the project(s) and/or asset(s), utilizing proceeds, and so
on, the same shall be disclosed in the offer document/disclosure document and/or in
continuous disclosures. In addition to the SEBI (Issue and Listing of Debt Securities) 2008
disclosure requirements, the SEBI has mandated disclosure requirements for issuers of green
debt securities, including: continuous review and assessment of identified green project(s)
and/or asset(s); continuous disclosure of utilized and unutilized proceeds; ensuring that all
project(s) and/or asset(s) funded by the proceeds of green debt securities meet their
documented objectives; and The SEBI site now includes the legal framework for green debt
securities (the “SEBI Green Framework”). As a result, it may be claimed that the SEBI Green
Framework operates parallel to the GBPs.

2.4 ESG AND SUSTAINABILITY REGULATION

Along with financial regulatory changes, governments are developing frameworks for long-
term corporate responsibility, most notably through environmental, social, and governance
(“ESG”) regulation. Non-financial ESG factors are typically used to identify investment
opportunities, challenges, and end-uses. In India, Regulation 34 of the SEBI (Listing
Obligations and Disclosure Requirements Regulations, 2015 (“SEBI LODR”) 5 requires the
top 1000 (one thousand) entities (based on market capitalization) to include a mandatory
business responsibility report (“BRR”) or a voluntary business responsibility and
sustainability report (“BRSR”) listing the company's ESG initiatives in their annual report.
However, according to the SEBI LODR, the BRR submission requirement would be phased
out after fiscal year 2021-22 and replaced with the mandatory submission of a BRSR. It is
worth noting that the corporate social responsibility framework established by the (Indian)
Companies Act, 2013 and existing rules aligns regulation on eligible green CSR activities,
annual reporting,

9
5
Regulation 34 of the SEBI (Listing Obligations and Disclosure Requirements Regulations, 2015.

10
and impact assessments - in order to encourage the adoption of best corporate governance
practices.

CHAPTER III
3.1 INTERNATIONAL GUIDELINES- THE ICMA GREEN BOND PRINCIPLES
To start with, the International Capital Market Association outlines the Green Bond
Principles (hereinafter referred to as principles), which has embodied the best practises
which could be followed in the issuing and usage of green bonds, it would be helpful to
quickly review the worldwide benchmark on green bond issuances.6 To support integrity in
the green bond market, these criteria demand a high level of openness and disclosure. The
four main parts of the Principles are-
a) The use of proceeds;
b) The method for evaluating and selection projects;
c) The management of proceeds; and
d) Reporting.
These principles have also enunciated the mandate of usage of the proceeds/revenue
generated from these green bonds be used in Green Projects where evident environmental
benefits can be assessed by the issuer of the bonds. Issuers should use a strict evaluation and
selection process, and they must explain to investors why those decisions were made and how
the project’s aims fit with those of environmental sustainability. The issuer shall further
monitor the funds in a suitable way to make sure that they are being used effectively to
advance the chosen green project. Last but not least, the issuers are required to maintain
current records of the funds’ usage, which should be updated often until the project is
finished.7

3.2 THE EUROPEAN UNION (EU) FRAMEWORK

The European Union has been looked at as a lead in terms of application of the Green Debt
legislation. After the announcement of the Green Deal in the year 2009, the EU has been
taking substantial and meaningful efforts in the promotion of the sustainability in the
industries and in this furtherance has also included a proposal of European Green Bond
Standard (EUGBS)

6
“Green Bond Principles”, INTERNATIONAL CAPITAL MARKETS ASSOCIATION,
11
 https://www.icmagroup.org/assets/documents/Sustainable-finance/2021-updates/Green-Bond-Principles-
June-2021-140621.pdf [hereinafter Green Bond Principles]. (Last accessed 09/11/22).
7
Id.

12
alongside the Green Deal Investment Plan.8 The council, thereafter, has released a legislative
proposal (the “EU Regulation”) on the European Green Bonds. The commission has
specifically emphasised that the standards are meant to be voluntary and not mandatory and
also, that they serve as the “gold standard” for how can the green bonds be generated while
adhering to strict sustainability standard which would also safeguard the investor’s interest. 9
The regulation can be said to be adapted from the Principles outlined by the ICMA. The EU
Regulation stipulates that the EU Taxonomy must be followed when using the revenues from
green bonds.10 Therefore, the green bond’s revenues must be completely invested in a project
that “substantially contributes” to any of the environmental goals as have been mentioned on
the Taxonomy Regulation. Further, the actions carried out cannot materially impair any of
these goals. These initiatives must be funded entirely by the green bond earnings. Regulation
also emphasises openness and guarantees it by establishing strict disclosure criteria that must
be met. This includes the need for several papers to be posted on website of the issuing party
till the maturity of the bond, the documents being, green bond factsheet, external evaluation,
allocation and impact report.
In addition, the regulation of the ESMA within this sector of the business is a
constructive step toward ensuring the achievement of the goals set out by the Regulation on
the external assessment. The standards for reporting are highly stringent; issuers are required
to produce annual allocation reports up to the point at which all of the bond proceeds have
been disbursed. In addition, there must be at least one impact report that is made available to
the public. When compared to the GBPs, this is only a key recommendation; yet, this is still
another enhancement above the GBPs. The trust of investors is bolstered by these reporting
rules, which also further strengthen the market’s transparency for green bonds. The creation
of the EUGBS is a positive step that might boost investor interest in this asset class and
extend the market for green bonds. Because there is limited place for it due to thorough
assessment, reporting, and disclosure, the standard’s strictness may aid in its mitigation.11
Additionally, the ESMA’s

8
“European Green Bond Standard”, EUROPEAN COMMISSION, accessible at https://ec.europa.eu/info/business-
economy-euro/banking-and-finance/sustainable-finance/european-green-bond-standard_en. (Last accessed
05/11/22)
9
“Commission Communication on the Sustainable Europe Investment Plan”, EUROPEAN COMMISSION,
accessible at Https://Ec.Europa.Eu/Commission/Presscorner/Detail/En/Fs_20_48. (Last accessed 11/11/22).
10
Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, and
amending Regulation (EU) 2019/2088. (18 June 2020).
11
“EU Sustainable Finance explained- Green Bonds”, KPMG, accessible at
https://home.kpmg/fi/fi/home/Pinnalla/2019/11/eu-sustainable-finance-explained-green-bonds.html. (Last
13
accessed at 12/11/22).

14
control of the external review procedure only strengthens the system. The EUGBS might
become a worldwide standard for best practises in green bond regulation with the right
implementation mechanisms. To implement the EUGBS, non-EU issuers may encounter
difficulties due to the necessity of alignment to the EU Taxonomy.12

3.3 ANALYSIS OF GREEN DEBT SECURITIES IN INDIA

In a concept paper published in 2015, India’s Securities and Exchange Board of India
(“SEBI”) outlined the main characteristics and advantages of green bonds.13 Additionally, it
acknowledged the value of green bonds in a Memorandum published in 2016 in order to
accomplish its projected Nationally Determined Contributions in accordance with the Paris
Agreement and finance its expansive renewable energy growth ambitions.14 The
Memorandum acknowledges that the SEBI (Issue and Listing of Debt Securities)
Regulations, 2008, the current framework, is insufficient for the issuance of green bonds. A
Circular on the disclosure criteria for the issuing and listing of green debt instruments was
subsequently published by the SEBI in 2017.15

The Circular includes instruments whose revenues would be invested in “green” assets or
projects in its broad definition of what makes a “green debt security.”16 This comprised
subcategories including energy from renewable sources, water management that is
sustainable, clean transportation, coping with climate change, energy efficiency, sustainable
waste management, sustainable land use, and biodiversity preservation. Additionally, the
SEBI has the authority to incorporate other project types as it sees proper. Additionally, the
Circular specifies a number of disclosure obligations for the offer stage. 17 This includes
outlining the environmental goals that drove the issuance of the securities and providing
information on the decision-making methodology used to choose the project or asset to
receive funding for. Details

12
Alexander Lehmann, “The EU green bond standard: sensible implementation could define a new asset class”,
BRUEGEL.
13
“Concept Paper for Issuance of Green Bonds”, SECURITIES AND EXCHANGE BOARD OF INDIA,
https://www.sebi.gov.in/reports/reports/dec-2015/concept-paper-for-issuance-of-green-bonds_31167.html
(Last accessed at 11/11/22)
14
Memorandum to the Board—"Disclosure Requirements For Issuance and Listing Green Bonds”, SECURITIES
AND EXCHANGE BOARD OF INDIA.
15
“Circular - Disclosure requirements for Issuance and Listing of Green Debt Securities”, SECURITIES AND
EXCHANGE BOARD OF INDIA ¶2.1. (Last accessed at 12/11/22).
16
“Operational Circular for issue and listing of Non-Convertible Securities (NCS)”, Securitised Debt
Instruments (SDI), Security Receipts (SR), Municipal Debt Securities and Commercial Paper (CP),
SEBI/HO/DDHS/P/CIR/2021/613.
15
17
Id at ¶2.2.

16
on the selected projects or assets, where the cash will be spent, must be disclosed by the
issuer.18 Any details pertaining to the utilisation of the cash for refinancing must be included
here. Additionally, the issuer must provide the tracking system used to monitor the allocation
of revenues to the designated projects/assets. In response to the issuer’s request, independent
review has been made optional.19 In its Memorandum, the SEBI defended this approach by
arguing that India’s market lacked sufficient independent reviewers. Furthermore, there is no
required review obligation under the international standards.20

Additionally, issuers are required to submit information on how the funds are being used,
which must be confirmed by an external auditor. Information on any revenues that were not
used must also be given. Along with qualitative performance indicators of the project’s or
assets’ environmental effect, issuers must also provide information on green initiatives in
their annual reports. Quantitative effect indicators are also welcomed, but if they cannot be
quantified, issuers may provide that information along with the reasons why. The procedures
and underlying presumptions used to create the indicators must be included with this
information.

The steps taken by SEBI to formalise the green bond disclosure rules are unquestionably
advantageous.21 The regulator is aware of the importance of these instruments and how they
might help India meet its sustainability requirements by bridging the financial gap. Legal
modifications have already resulted in a major increase in investor interest in the market for
green bonds, which has been very beneficial to the renewable energy sector. The
establishment of transparency regulations, continuing monitoring procedures, and reporting
duties has enhanced investor interest in and trust in the market.

But there is still a lot of work to be done. The definition of “green” in the Circular is quite
unclear, which promotes significant disparities since issuers have too much latitude in
deciding what constitutes a green project. The inclusion of “clean coal” projects under green
projects might potentially lead to a situation like what just occurred in China, which is
counter to the very point of green bonds. Lack of defined standards and taxonomies is a
major problem. The

18
SEBI Memorandum, ¶4.2.2.3.
19
SEBI Circular, ¶2.3.
20
Id.
17
21
Green bond guidelines notified – “key to facilitate investments in renewables & clean energy”, LEXOLOGY,
accessible at https://www.lexology.com/library/detail.aspx?g=8585b5c0-4b61-4279-961c-9883d 99f08bd,
(Last accessed at 13/11/22)

18
EU regulatory framework provides valuable guidance in this area since issuers who seek to
follow the EUGBS must also follow the EU Taxonomy, providing a thorough, persuasive
regulation that dispels any confusion over what constitutes an eligible green project. Since the
Climate Bonds Initiative also provides a thorough taxonomy that may be used as a guide for
developing this framework in India22, the SEBI itself recognised the relevance of this
taxonomy in its Memorandum.23 Similar to this, India needs a comprehensive and well-
coordinated taxonomy and set of criteria to help clear up any doubt on what precisely
constitutes a green bond. The comparability of bonds may be improved by setting relevant
standards.

The Reserve Bank of India, the country’s central bank, became a member of the Central
Banks and Supervisors Network for Greening the Financial System (NGFS) in April 2021. 24
The NGFS25, a worldwide network of banks working to create best practices for managing
climate risk, was introduced at the Paris “One Planet Summit” in 2017. The RBI and other
authorities are now examining the viability and potential for green financing in order to
promote the transition to sustainable economic development. The Securities and Exchange
Board of India (“SEBI”), India’s securities regulator, has also developed rules and guidelines
that are applicable to the country’s green bond framework. A “green debt security” is defined
under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 26 as
money obtained via debt securities used for project(s) or asset(s) falling under any of the
following general categories:

The standards for reviews are likewise extremely loose. The validity of these tools could be
improved by stricter external review requirements. It may also lessen the issue of
“greenwashing,” which is a widespread issue.27 The phrase, which was first used in 1986 by
Jay Westervelt, is used to characterise actions conducted by organisations that are not as
ecologically benign as they claim to be. Recent events have shown that greenwashing is an

22
Climate Bonds Taxonomy, Climate Bonds Initiative, https://www.climatebonds.net/standard/taxonomy.
23
SEBI Memorandum, ¶4.1.2.4.
24
“RBI joins Network for Greening the Financial System”, Apr 29, 2021, Press Release: 2021-2022/131,
https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=51496, (Last accessed 10/11/22).
25
Origin and Purpose, https://www.ngfs.net/en/about-us/governance/origin-and-purpose, (Last accessed
10/11/22).
26
Section 2(q), Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities)
Regulations, 2021.
27
Sanya Malhotra, “Green bonds: Is it green finance or green-washing?”, DOWN TO EARTH (Aug. 11, 2020),
accessible at https://www.downtoearth.org.in/blog/energy/green-bonds-is-it-green-finance-or-green-washing–
19
72755 (last accessed 11/11/22).

20
issue that affects all global green bond issuances. 28 For issuing green bonds in Europe, Three
Gorges has come under scrutiny. The issuer has received harsh criticism for its actions that
have harmed the local ecosystems and contaminated the water, notably in the case of the
Three Gorges Dam in China. To fund the Jirau Dam, which significantly harmed the
environment by flooding a rainforest, GDF Suez issued green bonds. Amundi has reduced its
Planet Emerging Green One Fund’s exposure to green bonds issued by the State Bank of
India (“SBI”) in India. This is owing to the fact that SBI’s green bonds are connected to the
funding of the Carmichael thermal coal mine in Australia, which has drawn a lot of criticism
due to the potential harm it might do to the Great Barrier Reef.29

Such occurrences underscore the need of ensuring that the earnings from green bonds are
entirely directed towards environmentally beneficial projects and assets, and strong review
systems may assist in ensuring the same. Second-party reviews may be carried out by
businesses like KPMG, Viego, and Sustainalytics, and the Climate Bonds Initiative also
offers third-party certification. Additionally, the SEBI may regulate the market for outside
reviewers, much as the ESMA, to increase investor confidence in the market. Such actions
might provide the Indian market for green bonds the much-needed boost it needs while
bolstering the legitimacy of the securities sold there.30 Additionally, it would guarantee that
the money raised through green bonds is used for initiatives that truly help the environment
and safeguard investor interests.

Since the first green bond offering in 2015, the Indian green bond market has expanded
significantly. The amount of money invested in the market over the previous year has shown
the enormous untapped potential in this industry. Moreover, because of the cost advantages
they provide, green bonds have become a well-liked method of funding sustainable
initiatives. Due to the advantages, they provide over conventional models, these instruments
may be very useful in funding infrastructure in India. India may benefit from the potential of
green bonds by implementing the proper regulatory procedures. This developing market
might get the

28
Yusuke Matsuzaki, “Environmental bonds stained by ‘green washing’”, Nikkei.
29
Margaryta Kirakosian, “Amundi axes State Bank of India green bonds over coal mine financing”, CITYWIRE
SELECTOR (Dec. 18, 2020), https://citywireselector.com/news/amundi-axes-state-bank-of-india-green-bonds-
over-coal-mine-financing/a1441102. (Last accessed 12/11/22).
30
Asi Guha, “Green Bonds: Key to Fighting Climate Change?”, ORF Issue Brief, (Oct. 18, 2019),
https://www.orfonline.org/research/green-bonds-key-to-fighting-climate-change-56757/. (Last accessed
21
12/11/22).

22
much-needed credibility boost via the creation of appropriate standards and the improvement
of review criteria.

CHAPTER IV
4.1 ISSUES AND CHALLENGES
Cost of borrowing- In India, green bonds have consistently been more expensive to
issue than traditional bonds. The average interest rate for green bonds issued since 2015 with
maturities of 5 to 10 years has typically been higher than the rate for corporate and
government bonds with similar terms, as shown in Chart 4a. This trend is also evident for
green bonds denominated in Indian rupees, as illustrated in Chart 4b. However, the interest
rate for green bonds denominated in US dollars and maturing in at least 10 years was lower
than that of corporate bonds. It should be noted that the majority of green bonds in India are
issued by public sector entities or businesses with stronger financial standing. The stock
prices of private sector issuers show that they are in better financial condition. 31 Companies
that prioritize ESG (environmental, social, and governance) factors have seen their stock
prices outperform those of other companies. The higher borrowing costs of green bonds in
India, despite their generally safe nature, could be attributed to asymmetric information,
elevated risk perception, and other governance challenges. According to existing research,
green initiatives often involve substantial upfront costs, with certain cost-saving benefits only
materializing over the long term. The maturity mismatch between green projects and their
financing further contributes to increased borrowing costs. 32 Information asymmetry and the
lack of a common definition of green financing sometimes led to “green-washing,” in which
investors are given incorrect information about the green bonds.33 Given that the Indian
financial system is still developing in comparison to the Western markets, many of these
problems are probably also prevalent there.34

31
Critical challenges facing the green bond market, International Financial Law Review, Baker Mckenzie,
October/November 2019, https://www.bakermckenzie.com/-/media/files/insight/publications/2019/09/iflr--
green-bonds-(002).pdf?la=en (Last accessed 13/11/22).
32
G20 GREEN FINANCE SYNTHESIS REPORT, https://www.bankofengland.co.uk/-/media/boe/files/quarterly-
bulletin/2017/the-banks-response-to-climate- change.pdf?
la=en&hash=7DF676C781E5FAEE994C2A210A6B 9EEE44879387 (Last accessed 12/11/22).
33
Berensmann, K et al., “Green finance: actors, challenges and policy recommendations”, German
Development Institute (DIE) Briefing Paper, 23.
34
Green bonds- Mobilising the debt capital markets for a low-carbon transition- Policy Perspectives, OECD
https://www.oecd.org/environment/cc/Green%20bonds%20PP%20%5Bf3%5D%20%5Blr%5D.pdf (Last
accessed 13/11/22).
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 Information asymmetry and the cost of borrowing- The high cost of borrowing is
considered the primary challenge, which may be linked to information asymmetries. Thus,
enhancing India's information management systems could aid in lowering borrowing
expenses, reducing maturity discrepancies, and leading to more efficient resource allocation
in this market. It's worth noting that several countries, including Australia, China, India, and
the United States, maintain databases on green construction projects within their respective
jurisdictions.35 Though India employs various reporting mechanisms, such as PAT (perform-
achieve trade) and RPO (renewable purchasing obligations) to track greenhouse gas
emissions, it lacks a comprehensive national measuring, reporting, and verification
framework for monitoring climate financing, similar to many other countries.36
Building out market infrastructure- The vast domestic market holds immense
untapped potential for green investments, which have only recently begun to gain traction.
Studies suggest that enhanced coordination between environmental and investment policies,
along with a practical policy framework at both national and state levels, could alleviate
existing frictions. Policy initiatives such as expanding the corporate bond market,
standardizing green investment terminology, ensuring consistent corporate reporting, and
bridging information gaps between investors and recipients could significantly address
market shortcomings." 37.

Keeping GSBs Green- There are no set standards for identifying activities that count
as qualifying green initiatives. As a result, the issuer depends on outside judgments to
determine how environmentally friendly projects are. The third party’s assessment of the
qualifying green initiatives may differ or lead to uncertainty. Due to a lack of clarity on the
qualified green initiatives, there is opportunity to redirect funds to non-green projects. Since
the proceeds are retained by the issuers for extended periods of time, the issuer may use them
for non-green purposes. This is a violation of the investing criterion and might damage the
GSB market’s reputation.

35
Shen, C., Zhao, (2020), “An Overview of Green Building Performance Database”, Journal of Engineering.
36
Jain, S. (2020), “Financing India’s green transition”, ORF Issue Brief No. 338, January 2020, Observer
Research Foundation.
37
RBI (2019), “Opportunities and Challenges of Green Finance”, REPORT ON TREND AND PROGRESS OF
BANKING IN INDIA (2018-19), 17-18.

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 Bondholders' Ineffective Contractual Protections Against “Defaults” For GSBs-
The issuer must adhere to the crucial investment condition of using revenues in approved
green initiatives.38 According to the OECD policy study on green bonds titled “Green Bonds
Mobilizing the Capital Market to Low Carbon Transition,” the investment contract that
governs the issuing of GSBs does not recognize the use of revenues in non-green projects as a
default. Investors do not have the ability to criticize the issuer as long as interest is paid on
schedule.

The Issue of Widespread Greenwashing- One major issue with the issuance of GSBs
is that the issuer creates the false impression that the funds will be used for environmentally
friendly endeavours. This is due to the lack of consistent global definitions or market
standards for identifying green sovereign bonds or quantifying their level of greenness. As a
result of greenwashing, investors become sceptical of the trustworthiness of GSBs.39

Other governmental measures- Another strategy would be to work with

organizations in the sector that are promoting the construction of “green buildings,” which
are structures that use less energy and water, manage waste more effectively, and provide
healthier living environments.40 Government agencies at various levels can collaborate with
these organizations to assess their operational and financial needs. Additionally, the
government can implement measures to enhance the profitability of non-conventional energy
production and delivery, particularly for small businesses. In India, well-crafted policies can
be implemented to provide financial incentives for green initiatives, while carefully
considering their impact on the supply chain, inflation, and fiscal consolidation.

CHAPTER V
5.1 CONCLUSION AND SUGGESTIONS

Implementing a clause mandating the "Green Use of Proceeds" in contracts to ensure that the
market's generated revenues are dedicated to supporting environmentally friendly initiatives is
crucial for upholding its credibility and resilience. An effective method to enforce this is by
incorporating a "green use of funds" clause in investment contracts, offering contractual
protection and remedies for investors in the event of non-compliance.

To guide the identification of "Eligible Green Projects," it is imperative for Indian authorities to
establish criteria since there's a lack of consistent standards or market guidelines for
determining project eligibility. Clearly defining penalties for "Defaults" in contracts is essential.
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Failure to adhere to the prescribed green fund utilization should be considered a contractual
default, warranting appropriate fines. This measure ensures that funds obtained from the sale of
Green Security Bonds (GSBs) are consistently channeled into eco-friendly initiatives
throughout the investment duration, promoting the attainment of actionable green objectives.

Issuers must precisely articulate the green actionable goals for which they are issuing GSBs,
fostering transparency and improved decision-making for investors. Providing incentives to
accomplish these green objectives would be advantageous, with tax breaks serving as a
motivating factor for issuers to achieve their distinct, measurable goals.

Depending on the chosen regulatory strategies, further adjustments to the framework of green
debt securities might be feasible. Regulators are cognizant of the challenges in expanding green
finance, including issues like "greenwashing," the absence of universally accepted industry
standards, and environmental compliance metrics. Global regulatory strategies appear to align
with Dr. Friedman's views on economic externalities like environmental degradation,
emphasizing emission control through taxes, reflecting changing notions about profit and
rationality in the business landscape.

Despite the Indian government's efforts in establishing and regulating the Green Bond market,
addressing existing barriers requires global initiatives. Using green debt securities aligns with
India's commitment to sustainable development, as evidenced by its pledges to reduce
greenhouse gas emissions and increase renewable energy usage.

The use of green debt securities presents a valuable instrument for India to accomplish its
sustainable development goals. Encouraging the issuance of green debt securities by the
government and providing consistent guidelines for issuers by SEBI are crucial. Harmonizing
local and global legislation and standards for green bonds is essential to establish a standardized
market. Defining a universally accepted "green" investment is vital to prevent
misrepresentations and for taxation purposes. Educating people about the benefits and processes
associated with Green Bonds is crucial for overcoming institutional barriers. Notably, the recent
introduction of "Blue Bonds" in the global market aims to finance the long-term sustainability
of oceans, seas, and marine resources, marking a significant development in this arena.

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