Going green for planet blue: For now, India's journey has begun well

Sustainable financing is on the verge of a big take-off, even as the sum raised so far tops $16 billion

On August 16, HDFC Ltd launched its green-deposit mobilisation programme with tenures ranging from three to ten years, to be priced at up to 6.55 per cent per annum. Earlier, in July, The Federal Bank had offered 4.99 per cent in equity to raise Rs 916 crore from the International Finance Corporation, and two funds managed by IFC Asset Management Company — IFC Financial Institutions Growth Fund and IFC Emerging Asia Fund. This is part of its commitment to ESG (environmental, social and governance) standards.

And, of course, there is ReNew Power’s listing on Nasdaq with an enterprise value of $8 billion. Clearly, there is glitter in green.

It was a novelty when Axis Bank raised $500 million with India’s first internationally-listed certified green bond on the London Stock Exchange in June 2016 (a carve-out within its $5-billion medium-term note programme.) Since then, green financing has caught on in a big way. Astonishingly, and little-known, is the fact that the amounts involved are bigger than in some of the more developed markets. (Yes, you read that right.)

The Reserve Bank of India’s (RBI’s) January Bulletin of 2021 estimates that as of February 12, 2020 (the latest data from the regulator), the outstanding amount raised via green bonds was $16.3 billion (it might be close to $18 billion now, but data is not publicly available). Of this, $8 billion was raised since January 1, 2018, which constituted about 0.7 per cent of all bonds issued in the local financial market.

Now, although this is a small proportion of total bond issuances, India did much better compared to China (0.3 per cent), the United States (0.2 per cent), and Japan (0.1 per cent). You can quibble that the Indian bond market is much smaller compared to that in these countries, but then, these are percentage numbers. Incidentally, the Euro area is the best performer, with 1.7 per cent.

Rising awareness

“We will deploy all of our green deposits in projects which contribute towards safeguarding the environment. It’s also intended to encourage customers to use eco-friendly materials and renewable energy such as solar and rain harvesting,” says Dilip Shetty, associate member of executive management and head of resources, at HDFC Ltd.

The Federal Bank will not deploy the entire Rs 916 crore in green financing, but “a portion of it is to be earmarked,” says Ashutosh Khajuria, the bank’s executive director. “Our commitment towards green projects is many times the amount raised in equity,” he adds. This is a reference to the leveraging that banks do with their equity capital. As for the pricing of such loans, “this will depend on the risks involved, and the prevailing market realities, whether it is bilateral or consortium-based.”

Foreign banks, too, are part of the big green game. Bank of America, for example, is “committed to $1.5 trillion in funding aligned to the United Nations SDG (Sustainable Development Goals), through 2030, supporting environmental transition and inclusive development,” says Asit Bhatia, managing director of global corporate and investment banking at Bank of America.

“As such, helping green energy companies to raise funds and offering our advisory services is a part of our broader ESG strategy.” The six largest banks in the US have said they will target net-zero greenhouse gas emissions before 2050.

Can more be done?

Ask Vineet Mittal, chairman, Avaada Energy, how far the production-linked incentive (PLI) schemes for solar photovoltaic technology will further the shift towards clean energy, and he says: “The PLI scheme announced recently has an outlay of Rs 4,500 crore and is spread across five years. While it is a welcome move, the scheme can only support a new capacity of 2.5-3 Gw, which is quite less compared to the requirement of 20 Gw per annum.”

He nevertheless believes that the scheme will help give a booster shot to India’s fledgling solar manufacturing industry, thereby reducing dependence on China.

As far as lenders are concerned, he believes that “the demand for the module is going to remain strong, and given a basic customs duty of 40 per cent in place, their exposures will be fairly secured.” He foresees possible delays in commissioning of facilities only due to Covid. “Hence, the government’s commitments on approvals and permits will help attract lenders to finance projects.”

The RBI’s January Bulletin notes that the share of green bonds, at 0.7 per cent of all bonds issued (in India) since 2018, compares to bank lending in India to non-conventional energy at about 7.9 per cent of the outstanding bank credit to the power sector, as on March 2020.

“We will see a huge shift in India towards clean energy, as the country has the largest renewable energy programme globally, of generating 450 Gw by 2030, as against 94 Gw today. This is a $500 billion opportunity, which I believe will interest global investors,” avers Bhatia.

What few agree to go on record about is the regulatory treatment accorded to such exposures, given its positive impact.

HDFC Ltd plans to provide a special rate of interest to its customers for construction of eco-friendly materials and designs. “Green projects in themselves tend to provide a lot of savings for the home buyer by way of solar power, lower energy cost due to LED lighting, water harvesting, and a healthy living  environment,” notes Shetty.

That being the case, is there an argument for lowering risk weights on green exposures by lenders? Or for setting favourable terms to raise long-term green bonds?

Most of the green bonds issued since 2015 had maturities of five years or above, but less than 10 years. However, some issuers, such as Yes Bank (in 2015), Indian Renewable Energy Development Agency (2017 and 2019), Rural Electrification Corporation (2017), Power Finance Corporation (2017), Indian Railway Finance Corporation (2017), and Adani Renewable Energy (2019) have issued green bonds with a maturity of 10 or more years.

We may have to settle a few issues before we travel down this road.

A paper by Saurabh Ghosh, Siddhartha Nath and Abhishek Ranjan of the RBI’s Strategic Research Unit of the Department of Economic and Policy Research in the January Bulletin describes the major challenges as “high borrowing costs, false claims of environmental compliance, plurality of green loan definitions, maturity mismatches between long-term green investment and relatively short-term interests of investors.”

Prime Minister Narendra Modi had said in his Independence Day speech (one in which he had held forth a lot on the green theme): “Our actions today will determine our future. Our today will set the theme of our 100 years of India’s Independence.”

For now, the country’s green journey has begun well.