India's green bond market is getting ready to raise funds through innovative ways

In recent times, sustainable finance has gained substantial attention to combating climate change and advocating for eco-friendly initiatives. However, mobilizing large amounts through banks may not meet the need, which stems from the need for creative alternatives to traditional forms of finance. Green bonds are a prominent tool in this field, enabling the production of funds for projects that are beneficial to the environment or the environment. While green bond issuance has witnessed a remarkable surge globally, India has generated substantial increases through these thematic bonds, despite its vast potential. Many governments are turning to such bonds to raise funds for critical investment needs. Thematic bond market started in 2008 with theissuance of the first labelled green bond by the World Bank. Since 2014, the worldwide market for sustainable finance has experienced substantial growth, mainly due to theissuance of green bonds. The Climate Bonds Initiative, Climate Bonds Initiative November 2022, issued cumulative green bond issuances as of September 30, 2022, havesurpassed US 2.0 trillion, including sovereign green bonds SGrBs issued by 26 sovereigns aggregating to US 230.9 billion. The European nations are major issuers of SGrBs, with 5 - year and 10 - year tenors being the preferred tenors of issuance. India has just picked up thematic bonds in the past few years, with the Government of India making a debut on Jan 25th, 2023, just a day ahead of the country s 74th Republic Day with a sovereign green bond issue. The Indian government has raised 80 billion dollars in 10-year and 5-year green bonds. Another tranche of 80 billion of 10 - year and 5 - year green bonds, to be referred to as SGrB in Indian markets, were offered on February 9, 2023. Although Indian corporations have raised aside from the Sovereign green bond issue, according to a Bloomberg NEF report, amounted to $43 billion. Green bonds have been used to finance the growth of renewable energy in the country, making it one of the largest sources of funding for renewable energy in the nation. There is still a lot more money required to finance India's green projects and issuers are facing various difficulties in harnessing green bonds effectively. Investors, issuers, and regulators frequently misunderstand green bonds, their benefits, and principles, which are one of the biggest obstacles to the green bond issue in India. Due to the lack of investor demand and compliance concerns, potential issuers may be deterred. Specialized training programs, workshops and awareness campaigns are necessary to educate stakeholders about the advantages and mechanics of green bonds. To boost investors' desire for green bonds, a supportive regulatory environment is crucial. Unwavering regulations and standards that reflect global best practices provide investors with confidence in the market. SEBI has taken steps in this direction by introducing rules for green bonds. Investor confidence will improve as refinement and alignment with international standards, including the Green Bond Principles and Climate Bonds Initiative. To maintain the integrity of the green bond market and foster investor trust, ensuring robust oversight, monitoring, and reporting mechanisms is essential. The nation has a long-running pipeline of sustainable projects like renewable energy and energy efficiency, but many grapple with development, finance, and bankability hurdles. Investors cannot evaluate new projects' environmental impacts or financial sustainability without a specific project pipeline and standardization. Incentivizing project developers and government agencies to prioritize green initiatives, completing project approval processes, and offering technical assistance and financial support can enhance qualified project supply. Then there's the problem of pricing the issuances. External evaluations, certifications, and reporting can increase green bond issuance costs. In price-sensitive India, higher issuing costs can dissuade issuers. This challenge necessitates novel financing techniques like green bond insurance or guarantee programs, concessional funding, tax benefits or subsidies, or carbon credits for issuers. The use of these techniques can reduce expenses and make green bonds more profitable for issuers. Green bonds are commonly issued by Indian issuers in the international market dollar bonds, to gain the advantages of tighter pricing and Greenium. Lastly, green bonds need investor appetite and market liquidity. Despite the increased interest from institutional and retail investors, the Indian market lacks depth and breadth. Investors may be worried about green bonds' risk-return profile, transparency, and innovation compared to regular fixed-income securities. Transparency, standardized reporting and independent third-party verification can enhance investor confidence and market liquidity by enacting more transparency and transparent reporting, boosting investor confidence and market liquidity. Governments often offer tax incentives and carbon credits for sustainable practices and combating climate change. Some of these programs include projects, such as afforestation projects, renewable energy installations, or energy efficiency initiatives. The purchased offsets can be utilized to compensate for the buyer's emissions. Green bond issuance has the potential to mobilise substantial funds for sustainable projects in India and support the country's climate objectives. However, above-mentioned challenges must be addressed to unlock the full potential of this financing instrument. The Economic Times' views do not reflect the opinions of the Editor-in-Chief of the Economic Times.