Securities and Exchange Board of India (SEBI), the securities’ markets regulator, finalised their official green bond requirements yesterday after going through a public consultation in December. Impressively quick turnaround from SEBI’s decision in late November to establish requirements! Clearly, green bonds are a priority for India’s government.
We’re still waiting for the full version of the final listing requirements to be published, but the key features of the new requirements decided by the Board yesterday have been released:
- What is green: The requirements do not include a definition of what is green. Instead, SEBI will make evaluations of this on a case-by-case basis: “a green bonds may be as specified by SEBI from time to time”.
- External review: Using a second party review or third party certification to review the green credentials of the bond is optional.
- Tracking of proceeds: Issuers are required to disclose the procedures they will use to track green bond proceeds, “including the investments made and/or investments earmarked for eligible projects” and get this verified by external auditors. Placing proceeds in an escrow account is not mandatory (this is a welcome change from the draft regulation released for public consultation in December).
- Reporting: Issuers are required to disclose use of proceeds and list of projects to which green bond proceeds have been allocated in the annual report/periodical filings made to the stock exchanges. It’s not clear yet whether environmental impact reporting will be recommended as well – this was included in the draft issued in December, but not mentioned in the released summary of the final requirements.
For those of you familiar with the Green Bond Principles, you might recognize that they have been used as the backbone of SEBI’s requirements for green bonds. This is a welcome step to achieve international harmonisation and move to a global green bond market.
Some room for improvement going forward
There are however a couple of areas where we were hoping for more clear guidance from SEBI:
- Clearer guidance on what is green: We were hoping SEBI would provide clear definitions for what qualifies as green projects. There are several types of international definitions and standards that could be leveraged by SEBI: for example the Climate Bonds Taxonomy and Standards; definitions used by large development finance institutions such as the World Bank, IFC and the European Investment Bank; or asset specific standards such as FSC standard for sustainable forestry and building standards such as LEED, BREEAM and Energy Star.
As the market grows, moving to standardised definitions here rather than deciding on a case-by-case basis is crucial to ensure transaction costs for issuers, investors and the regulators stay sufficiently low to really scale the market. China, who released official green bond guidelines a few weeks ago, included a catalogue of specific green project criteria with their guidelines.
- Requirement for independent review: In a next iteration of the requirements, it would also be good to see a requirement for an independent review of the green credentials, rather than making this optional. This would give investors more assurance that the green bonds issued in the market have robust green credentials – especially in the absence of clear criteria for what is green from the regulator.
Linking India’s green bond market to its INDC
But SEBI’s statement yesterday was exciting for more than just the release of the specific requirements. The statement also included an explicit mention that SEBI are seeing the green bond market as a key tool to help raise the finance needed to meet the ambitious targets of India’s Intended Nationally Determined Contribution (INDC) as established for COP21 - essentially India's climate change action plan. Yes! This is exactly the kind of thinking we need from governments to translate the high-level success of the Paris agreement into real transition on the ground. The INDCs provide a great starting point for developing pipelines of green investments that can be financed through the green bond market. Fabulous to see India connecting the dots on this!
2016: The year for green bonds to take off in India
2015 was the year India entered the green bond market, with a total of US$1.1bn of green bonds issued from a handful of pioneer issuers (Yes Bank, Export-Import Bank of India, CLP Wind Farms and IDBI). Now that official guidelines are out and the government is serious about implementing their INDC, expect 2016 to be the year Indian green bonds really take off! Well done, SEBI!
