Eye on Emerging Markets - The Indian Framework on Sovereign Green Bonds

Eye on Emerging Markets | Q4 2022

The Indian Framework on Sovereign Green Bonds

At the 2021 United Nations Climate Change Conference, more commonly known as COP26, India had announced the following elements of India’s climate action to achieve the Nationally Determined Contribution (NDC) under the 2015 Paris Agreement:

Per some estimates, India needs ~USD 2.5 trillion by 2030 and USD 15 trillion by 2070 to achieve these climate goals. The procurement of green finance for achieving these goals would be greatly aided by the implementation of a green taxonomy which sets out clear definitions and strictures of activities which help reduce the impact of climate change. India is working towards a green taxonomy and in January 2021, the Department of Economic Affairs, Ministry of Finance had set up a task force for finalising the same. The task force submitted its report in the beginning of 2022. The policy however is under consideration by the Government of India (“GoI”) and is yet to be released for public comments. While a formal green taxonomy is awaited, one may look at the recently published Framework for Sovereign Green Bonds (Framework) to gauge what the GoI considers to be a “green project”. In the Union Budget 2022-23, the GoI had announced the issuance of Sovereign Green Bonds (“SGBs”) for mobilising resources for green infrastructure. In furtherance of the same, the GoI issued the Framework in November 2022. The Framework has been designed to align with the four core components which have been highlighted in the Green Bond Principles issued by the International Capital Markets Association (ICMA). These four core components are: (i) use of proceeds; (ii) process for project evaluation and selection; (iii) management of proceeds; and (iv) reporting. We have set out below, in brief, the key principles set out in the Framework for each of these components: Use of proceeds The proceeds from issuance of the SGBs will be utilized to finance / refinance expenditure for green projects. A project will be classified as a “green project” if it satisfies the following principles: The Framework clarifies that the proceeds from issuance of the SGBs will be expended in green projects in the form of investment, subsidies, grants, tax breaks, operational and R&D expenditures. The Framework also sets out that investment in, inter-alia, projects involving new or existing extraction, production and distribution of fossil fuels or where the core energy source is a fossil fuel are restricted. However, an exception has been made for relatively cleaner compressed natural gas when it is used in public transportation projects.

Written by Aditya Periwal and Anuja Tiwari, AZB & Partners

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Process for project evaluation and selection For the purposes of undertaking project evaluation and selection, the Framework has constituted an inter-ministerial Green Finance Working Committee (GFWC) to make the final decision on whether or not a project is eligible for financing through the proceeds of SGBs. The relevant ministries / departments will conduct an internal evaluation and prepare a list of eligible projects and the GFWC will thereafter prepare the final list of projects in alignment with inter-alia, the ICMA Green Bond Principles, UN Sustainable Development Goals, the Framework, as well as the various national environmental policies. Management of Proceeds The proceeds from the issuance of the bonds will be deposited to the Consolidated Fund of India (CFI) and then funds from the CFI will be made available for eligible green projects. For the purposes of ensuring that the proceeds’ allocation and accounting is transparent, a distinct account will be set up by the GoI. The Public Debt Management Cell will monitor the allocation of funds towards eligible expenditures. Unallocated proceeds, if any, will be carried forward to successive years for investment in eligible green projects. Reporting Until the complete allocation of proceeds and thereafter in case of any material changes, the GFWC will prepare and release an annual report setting out inter-alia, (i) information about the issuance; (ii) list of allocated proceeds to eligible projects and the type of expenditure; (iii) total quantum of proceeds generated, allocated and remaining unallocated; and (iv) expected impact of the projects in quantitative indicators (to the extent possible) indicating the reduction in carbon intensity, other environmental benefits and, where possible, social co-benefits. The allocation and utilisation of proceeds will also be within the purview of audit by the Comptroller and Auditor General of India. Given that India is a major contributor to green house gas emissions, not just Indian, but global stakeholders are rooting for India to achieve its climate goals and while the Framework is not the equivalent of a green taxonomy, it does give insight into what India’s Green Taxonomy could look like. It can be said that the adherence to ICMA’s green bond principles and emphasis on alignment with the UN SGDs are definitely a step in the right direction of what is sure to be a long and winding road.

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India is working towards a green taxonomy and in January 2021, the Department of Economic Affairs, Ministry of Finance had set up a task force for finalising the same.

Reach 500 GW non-fossil energy capacity by 2030;

Reduction of the carbon intensity of the economy by 45 per cent by 2030, over 2005 levels;

Reduction of total projected carbon emissions by one billion tonnes from 2021 to 2030;

50 percent of its energy requirements from renewable energy by 2030;

Achieving the target of net zero emissions by 2070.

Encourages energy efficiency in resource utilization;

Reduces carbon emissions and greenhouse gases;

Promotes climate resilience and / or adaptation;

Values and improves natural ecosystems and biodiversity especially in accordance with the UN Sustainable Development Goals (UN SDGs).

Anuja Tiwari Partner, New Delhi AZB & Partners E: anuja.tiwari@azbpartners.com T: +91 9717798959

Aditya Periwal Partner, Mumbai AZB & Partners E: aditya.periwal@azbpartners.com T: +91 9619173141

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1 International Capital Market Association - Green Bond Principles (2021) https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/

Eye on Emerging Markets | Q4 2022