Rehaul rules to improve financing Indian green projects: Fitch unit

India needs to make further structural changes to improve financing conditions for project developers to build upon sovereign green bond issuance to scale up domestic funding capacity, according to Sustainable Fitch.

In a report listing steps to revise the framework, the unit of Fitch Ratings said implementing public-sector credit guarantees would help lower financing costs. Also, offering credit default swaps to increase default protection for investors.

India has not yet had a green taxonomy, despite GSSS bond issuance activity from Indian entities since 2015. The Sustainable Finance Roadmap of India, set up by the government in 2020, aims to establish a taxonomy for sustainable activities, which we believe is crucial to establish the definition of eligible green activities. Such a step would help in providing more clarity for investors and encouraging further issuance in the domestic green bond market, it added.

India's first issuance of Sovereign Green bonds in January 2023 comprised two tranches, with five-and 10-year maturities, totalling Rs 80 billion (about $ one billion). A second offering comprised two tranches with five- and 10-year maturities raised an additional Rs 80 billion on February 09. The proceeds from the sovereign green bonds will go towards projects that meet India's decarbonisation targets.

It added that the bonds are expected to be held largely by domestic investors, incentivised by the national climate policy to mobilise financing resources for green activities.

Following the sovereign green bond issuance, we would expect project developers to use the momentum in the market and seek capital-raising directly from the domestic bond market, it added.

Sustainable Fitch said the outstanding amount of GSSS1 bonds issued by Indian entities stood at $19.17 billion by December 2022, making up roughly 3.8 per cent of India's overall outstanding corporate bonds. In terms of issuance, green bonds accounted for the majority of labelled bonds issued in India, accounting for a total of $20 billion by January 2023.

Indian green bond issuers are heavily concentrated in the energy sector, dominated by large energy companies using the proceeds to build renewable energy projects, particularly solar.

The costs associated with reaching net-zero emissions by 2070 are massive. Research from an Indian think-tank, Council on Energy, Environment and Water, indicates that the country will need cumulative investments of $ 10.1 trillion to scale up generation from renewable energy and associated generation, distribution and transmission infrastructure.

Fitch unit said the government's clean-energy green growth targets, incentive policies and programmes would spur further fundraising needs from domestic issuers in renewable energy, energy efficiency and clean transportation.