1) Introduction
In a time when environmental degradation and climate change are becoming more widely recognised, sustainable investment practices have moved from the periphery to the mainstream of global finance. Sovereign Green Bonds (hereinafter referred to as, “SGBs”), one of the many tools causing this change, have become a crucial instrument for governments in regions where they are operational, enabling them to fund green initiatives and show their dedication to a sustainable future and climate commitment. This article delves into the rising prominence of SGBs, exploring their significance in fostering sustainable investment practices and examining their potential impact on economies and the environment.
2) Key Features and Understanding
Governments can raise money for environmentally beneficial initiatives by issuing SGBs. These bonds not only function similar to traditional government bonds but also include a promise that the money raised will go towards funding or refinancing initiatives that help mitigate the effects of climate change, adapt to them, and enhance the environment.
Key characteristics of SGBs include:
(a) Use of Proceeds: Funds are allocated to eligible green projects such as renewable energy, energy efficiency, clean transportation, sustainable water management, biodiversity conservation, and green buildings.
(b) Project Evaluation and Selection: Issuers are required to set up a strong system for assessing and choosing projects that satisfy specified environmental standards. This process often involves a detailed review of the project's potential environmental benefits, its alignment with national and international sustainability goals, and its overall contribution to a greener economy. To ensure credibility and transparency, many issuers also seek third-party verification or certification to validate their project selection process and environmental impact assessments. This external review helps to build investor confidence and ensures that the projects funded by SGBs genuinely meet rigorous environmental criteria.
(c) Reporting and Transparency: Regular reports on the allocation of proceeds and environmental impact of financed projects are provided to maintain investor confidence. These reports detail how the proceeds from the bond issuance have been allocated across various eligible green projects. Going beyond mere allocation, they also strive to quantify the environmental impact of these projects.
3) Global Trends and Case Studies
Over the past ten years, the green bond market has grown exponentially and has become crucial. Among the elements causing this increase are:
(a) An increase in investor demand for assets that are in line with ESG (Environmental, Social, and Governance) principles.
(b) The Paris Agreement, adopted in 2015, is an international accord where countries committed to reducing greenhouse gas emissions and limiting global warming. The Paris Agreement's obligations made by governments to combat climate change. As part of their commitment, many governments are turning to SGBs as a way to finance projects that help them meet their emission reduction targets and promote sustainable development.
(c) The demonstration impact promotes the global adoption of green finance techniques.
4) Impact and Challenges
SGBs have the potential to make a significant impact however, they face certain challenges. Environmentally, SGBs can fund initiatives that improve ecosystem services, preserve natural resources, and lower greenhouse gas emissions. Economically, green investments can boost innovation, create employment opportunities and improve infrastructure. Socially, these initiatives can improve living circumstances and increase access to sanitation and clean water.
Challenges to SGBs include risk of greenwashing, where issuers may misallocate funds to non-green initiatives or exaggerate environmental benefits. Another concern is ensuring that SGBs fund projects that would not have been possible otherwise. Finally, accurately evaluating a project's efficacy and demonstrating its contribution to sustainability objectives can be challenging.
Further, SEBI vide circular titled “Dos and Don’ts Relating to Green Debt Securities to Avoid Occurrences of Greenwashing” dated February 3, 2023 i.e. “SEBI Greenwashing Circular”, mandates issuers to ensure accurate disclosures, transparent reporting of proceeds, and third-party verification of projects to prevent misleading claims about environmental benefits. This initiative safeguards investor trust and promotes credible sustainable development practices.
The “Framework for Sovereign Green Bonds” by the Department of Economic Affairs addresses greenwashing through transparency and accountability. It emphasizes rigorous project evaluation, annual reporting of proceeds, and external reviews, ensuring adherence to environmental criteria and boosting investor confidence.
5) Significance for Sustainable Investment Practices
SGBs hold immense significance for promoting sustainable investment practices:
(a) Mobilising Capital: SGBs make it easier for money to go into environmentally friendly initiatives that might otherwise have trouble finding support;
(b) Improving Accountability and Transparency: SGB reporting standards increase public confidence in governmental actions;
(c) Fostering Market Development: By expanding the availability of green assets and drawing in a wider spectrum of investors, SGB issuance helps the green bond market grow; and
(d) Establishing Best Practices and Standards: By encouraging honesty and legitimacy, sovereign issuers frequently take the lead in creating standards for the green bond market.
6) Legal Framework
The legal landscape governing Sovereign Green Bonds is evolving, with increasing attention on transparency and comprehensive disclosure. The existing disclosure framework under the Securities and Exchange Board of India ("SEBI”) (Issue and Listing of Non-Convertible Securities) Regulations of 2021[1] (“NCS Regulations”) covers certain disclosures in the offer document for all kinds of non-convertible securities as defined under Regulation 2(1)(w) of the NCS Regulations.
The Schedule I of the NCS Regulations provides the initial disclosures to be made in the offer document for public issuances and private placements of non-convertible securities. Further, the SEBI (Listing Obligations and Disclosure Requirements) Regulations of 2015 provide certain additional disclosures to be made by the issuer company on an ongoing basis[2].
Recently, SEBI has taken steps to broaden the scope of sustainable finance in the Indian securities market. On August 16, 2024, SEBI released a consultation paper[3] proposing an expansion of the sustainable finance framework. Implementing these proposals, SEBI amended the NCS Regulations of 2021 through the SEBI (Issue and Listing of Non-Convertible Securities) (Third Amendment) Regulations, 2024, issued on December 11, 2024 (“Amendment Regulations”).
Pursuant to the Amendment Regulations, the framework for green debt securities was expanded to include the concept of yellow bonds and blue bonds. Yellow bonds focus on financing solar energy projects, while blue bonds are dedicated to sustainable water management and ocean conservation initiatives, reflecting SEBI’s commitment to promoting a broader spectrum of sustainability-focused investments.
Previously, Regulation 2(1)(q) of the NCS Regulations defined ‘green debt securities’ to cover securities financing specific project types, including renewable energy, clean transportation, climate-resilient infrastructure, sustainable waste management, pollution control, blue bonds for sustainable water management, yellow bonds for solar energy, and transition bonds.
The Green Bond Principles (“GBP”), developed by the International Capital Market Association (“ICMA”), serve as voluntary guidelines promoting transparency, disclosure, and reporting in the green bond market. Prior to the SEBI Greenwashing Circular, the GBP were widely followed to ensure credibility. SEBI has since incorporated elements of the GBP into its regulatory framework, mandating issuers to adhere to stringent disclosure norms and align with global best practices. This alignment has strengthened India’s position in the global green bond market, fostering investor trust and market growth.
The Amendment Regulations have expanded this framework by introducing the concept of ‘Environmental, Social and Governance Debt Securities’ (“ESG Debt Securities”) under Regulation 2(1)(oa) of the NCS Regulations. This broader category encompasses securities such as social bonds, sustainable bonds, sustainability-linked bonds, in addition to green debt securities.
On a global scale, the GBP, developed by the ICMA, serve as widely recognized voluntary guidelines for issuing green bonds. The GBPs promote integrity in the green bond market through recommendations for transparency, disclosure, and reporting. While not legally binding, the Green Bond Principles have become a benchmark for best practices in the global green bond market, promoting transparency and investor confidence. Several jurisdictions and stock exchanges reference the GBP in their listing requirements for green bonds.
SEBI Greenwashing Circular mandates issuers of green debt securities to adhere to stringent disclosure norms, ensuring transparency and accountability. It emphasizes the need for accurate reporting on the use of proceeds, environmental impact assessments, and third-party verification of funded projects. By setting clear guidelines, SEBI aims to prevent the misallocation of funds and misleading claims about the environmental benefits of projects, thereby safeguarding investor trust and promoting genuine sustainable development practices.
7) Conclusion
A major advancement in the shift to a more resilient and sustainable global economy is the growing emphasis on SGBs. They are positioned to grow in importance as a means of funding the shift to a low-carbon, ecologically sustainable future as governments throughout the world step up their efforts to combat climate change and accomplish the Sustainable Development Goals (“SDG”) which were adopted by the United Nations in 2015. are a collection of 17 (Seventeen) interlinked global goals designed to be a "blueprint to achieve a better and more sustainable future for all" by 2030.
8) The Future of Sovereign Green Bonds
The future of SGBs looks promising, with several trends likely to shape its evolution such as (a) standardisation of green bond frameworks and reporting requirements aims to improve transparency and comparability, (b) provides innovation which delivers new kinds of green bonds that tie bond interest rates to predetermined sustainability goals such as sustainability-linked bonds and (c) expansion and growth of the SGB market to reach new nations and areas, especially in developing countries with high need for green investments.
The long-term viability and prosperity of the SGB market will depend heavily on regulators' capacity to uphold transparency and encourage market stability. As the market develops, SGBs will remain essential in raising funds for environmentally friendly initiatives, improving accountability and transparency, and encouraging sustainable investment methods around the world. It is crucial to address the risk of greenwashing and provide repetitive checks and assessments for any potential threat and evaluate whether the existing framework will require any stringent measures. Regular evaluations will help reinforce the framework and adapt it to the evolving dynamics of the green bond market.
Authors:
Apurva Kanvinde
Partner, Juris Corp
Email: [email protected]
Aditya Tanwar
Associate, Juris Corp
Email: [email protected]
Disclaimer:
This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.