30-year sovereign green bonds may attract insurance companies, not banks

The 30-year sovereign green bonds, recently included in the central government’s borrowing schedule for the second half of the current financial year, may struggle to generate interest among commercial banks. Insurance companies, on the other hand, are likely to push demand due to regulatory requirements
 

In January this year, the Insurance Regulatory and Development Authority (Irdai) issued a notification categorising an investment in sovereign green bonds as “investments in infrastructure”. It classified such bonds as "central government securities."
 

“Insurance companies have to invest a minimum of 15 per cent of their life fund AUM in the ‘infrastructure and housing’ category, as defined by Irdai. Since green bonds qualify for this, insurance companies will be natural buyers. This tenor of a green bond is based on the Reserve Bank of India's discussion with bond market participants. In fact, a 30-year tenor green bond gives insurance companies the advantage of duration, as well as eligibility in the infra and housing category,” said Churchil Bhatt, executive vice-president at Kotak Life Insurance.
 

But amid lack of any environmental, social, and corporate governance (ESG) mandate, market participants do not witness significant demand from banks for green bonds.
 

As part of its borrowing programme, the central government is set to raise Rs 20,000 crore via sovereign green bonds.

This issuance shall comprise Rs 10,000 crore of 30-year green bonds, and an additional Rs 5,000 crore each of bonds with maturities of 5 years and 10 years. Funds generated via the sale of green bonds will be allocated to public sector projects aimed at decreasing the carbon footprint of the economy.
 

“We are still to see broad acceptance of green bonds onshore. Some corporations or banks may buy it on their own because the amount is small… But there is no ESG mandate as such which has come up. Institutions can buy it on their own, giving some credence to their responsibility towards the environment,” said Naveen Singh, head of trading & EVP at ICICI Securities Primary Dealership.
 

In the previous financial year, the government had raised Rs 16,000 crore by issuing two tranches of 5-year, and 10-year bonds. The greenium, which signifies the premium investors are willing to pay for green bonds because of their sustainability impact, reduced from 6 basis points in the first tranche to just 1-5 basis points in the second tranche.
 

Market participants said that the absence of incentives for banks in the green bond market has resulted in minimal trading activity regarding these bonds in the secondary market. Consequently, banks have struggled to divest their holdings, resulting in green bonds remaining stagnant in their portfolios.
 

“Green bonds will be part of the H2 borrowing calendar, but in small size again … We are somewhat disappointed by lack of commitment from the government to this programme,” a report by Nomura said.
 

Meanwhile, a segment of the market believes that the bonds may find significant demand from foreign portfolio investors.