Green taxonomy ‘crucial’ to future India green bonds, says Sustainable Fitch

Regulatory incentives help India raise $2bn from first two sovereign green bonds.

India flag flying

The creation of a green taxonomy framework is essential to support the domestic Indian green bond market, according to an analyst note from Fitch’s ESG business.

“We believe [that a taxonomy for sustainable activities] is crucial to establish the definition of eligible green activities, providing more clarity for investors and encouraging further issuance,” the analysis concluded.

Unlike most of the world’s biggest markets, India has yet to formally announce the development of a green taxonomy, although a finance ministry task force has been asked to “suggest” a potential draft. Details of the process and deliberations have otherwise been kept under wraps.

It comes soon after India entered the sovereign green bond with a debut $1 billion local currency deal in January, followed by a second offering which raised an equivalent amount on 9 February. Proceeds will be ringfenced for decarbonisation and renewables projects, although the details of specific beneficiary projects were not provided.

Fitch analysts told Responsible Investor that they expect local commercial banks and insurers to represent the majority of investors for the sovereign green bonds, supported by regulatory incentives which have been put in place to encourage demand.

The issuance will not be used to finance activities relating to “oceanic resource mining” activities for nickel, copper, cobalt and manganese, after investors and ESG bond bodies raised concerns over their inclusion in India’s green bond framework.

India’s debut green issuance is intended to stimulate local demand for sustainability-related bonds after years of tepid interest from domestic investors. An analysis by the Securities and Exchange Board of India (SEBI) has suggested that local issuers currently find foreign exchanges more attractive to list green bonds due to a lack of domestic demand and more favourable pricing.

Government statistics show that Indian companies raised nearly $7 billion through overseas-listed ESG and green bonds in 2021 but have raised just $0.5 billion under India’s national green bond framework in the five or so years since its introduction.

The issuance may also encourage project developers to use the momentum in the market and seek capital-raising directly from the domestic bond market, said Fitch. The firm noted, however, that structural changes are still needed to improve financing conditions such as implementing public-sector credit guarantees to lower financing costs, or strengthening default protection through credit default swaps.