Green bonds appear to have got off to a circumspect start in India. More than a year after the first such instrument was sold by the government, follow-up issuances have dried up.
The absence of financial institutions with a focus on green financing, expectations of returns higher than what the sovereign bonds yield, and the lack of investors enthusiastic about environment protection and corporate governance are said to be obstacles in getting this market to take off.
“Globally, there are dedicated investors for sustainable funds that only look at green financing. We don’t have that set of people in India,” said Vikas Goel, MD & CEO at PNB Gilts. “The current set of investors in Indian bond markets don’t have either the mandate or an incentive to pay a greenium. They have no obligations of investing in these green bonds as an investor,” he said.
Last week, the Reserve Bank of India had to cancel the first green bond auction of this fiscal as investors refused to pay a premium and sought yields at a higher level than the RBI and government were comfortable with. The investors sought yields at 7-7.05% for the green bonds when the 10-year benchmark bond was trading at 6.99%, people familiar with the development said.
Globally, there are certain investment pools that will devote a percentage of their funds to the green objective. In many countries, their sovereign funds have an internal mandate, driven by government policy that would allocate a certain portion in green financing.
Norway’s sovereign wealth fund, one of the largest in the world valued at $1.7 trillion, now includes ESG mandates in its fixed-income portfolios.
“Our investment mandate has specific requirements for responsible investment. We are therefore increasingly integrating ESG data into our investment processes. The mandates for our portfolio managers require them to take ESG considerations into account in their analyses,” said a February 2024 report by the Norges Bank Investment Management, which handles the fund.
Domestically, there are no bonds, other than the sovereign green bonds that invest specifically in ESG. There are nine ESG-specific equity mutual funds in India with a corpus of ₹10,908 crore, which is insignificant to the total asset value of the equity mutual funds at ₹23.12 lakh crore.
“There are no dedicated bond ESG funds because there is no government mandate, everyone goes for G-Secs and there is no investor class that has developed that invests in ESG-specific funds, especially in the bond market,” said Rahul Prithiani, Senior Director and Global Head at Crisil MI&A.
The investor class in India today has a choice to choose from green and non-green because of the lack of mandates.
