Sovereign Green Bonds: Assessing the Greenwashing Risks and Challenges vis a vis India's Climate Goals

Written by Devesh Pratap Mall and Oshin Beniwal, the authors are law students currently pursuing BA.LLB from National Law University, Jodhpur

Introduction

Green bonds, when employed properly, can become effective tools to raise money for climate-friendly projects, allowing countries to release additional environmental assets on the market. Translating rhetoric, the government has indicated that it intends to support green finance and that will require addressing regulatory gaps and enhancing transparency across the bond issuance process. In light of this, evaluating the potential for greenwashing and the regulatory obstacles associated with Sovereign Green Bonds is critical to India's climate goals. 

Sovereign Green Bonds and India

The Sovereign Green Bond was introduced in India recently in the Union Budget of 2022-2023 by the Finance Minister of the Union of India to mobilize for mobilizing resources for green infrastructure to meet India's climate commitments. The Indian government has looked at a number of options, including sovereign green bonds, to fund these lofty goals and assist with other environmental projects. In order to raise money for energy efficiency programmes, renewable energy projects, and other ecologically friendly projects, India may need to issue sovereign green bonds.

India’s Climate Commitments And NDCs Vis-A-Visvis A Vis Sovereign Green Bonds

Given its ambitious Nationally Determined Contributions (NDCs) under the Paris Agreement, India is demonstrating its commitment to both addressing climate change and achieving economic growth. As a powerful financial tool, sovereign green bonds may help India get closer to meeting its climate targets by providing a route to sustainable development and raising money for environmentally friendly projects and infrastructure that is resilient to the climate. 

By 2030, India aims to produce 40% of its total electricity from non-fossil fuel sources, but reaching this goal will cost a lot of money. India's attempts to mitigate climate change and promote sustainable development. Sovereign green bonds have the potential to bolster investments in energy-efficient technology and infrastructure, resulting in several advantages like lower expenses, less energy usage, and decreased emissions. Additionally, sovereign green bonds can be used to fund the development of decentralized renewable energy systems like microgrids and rooftop solar panels, which can provide access to electricity in isolated and disadvantaged areas. 

Greenwashing And Other Surrounding Concerns In Sovereign Green Bonds

When businesses or organizations deceive consumers about their environmental or sustainability initiatives, it's considered a deceptive marketing tactic. This practice is alarming because it undercuts sincere attempts to address urgent environmental concerns and misleads customers. Greenwashing is a problem that goes beyond simple dishonesty. Companies may be less inclined to engage in sincere sustainability initiatives if they think they can profit from being seen as environmentally conscious without really making significant changes. 

This feeds into a vicious circle of dishonest environmentalism, undermining our ability to work together to solve urgent environmental issues. Governments issue these bonds to collect money expressly for initiatives like the development of renewable energy, reducing the effects of climate change, or conserving biodiversity. Sovereign green bonds have the ability to expedite the shift to a more sustainable economy; yet, there is much worry regarding the risk of greenwashing.

Analysis Of Existing Indian Framework And International Guidelines, And Practice

Existing Indian Framework

In the present framework, the Government of India (GOI) defines the "green" sector and the procedure to guarantee that investments will be directed towards it. A Green Finance Working Committee (GFWC) is mentioned in the framework as a means of assessing and choosing a specific project. Under the advice of specialists, the concerned ministry will carry out the project's preliminary assessment. 

International Guidelines and Practice 

In January 2014, the International Capital Market Association (ICMA) unveiled the Green Bond Principles, which form the basis for numerous contemporary green labels and significantly contributed to the subsequent growth of the market (ICMA 2014). Since then, there has been a notable expansion in the certified green bond market. Prominent commercial financial firms brought them together under the ICMA's aegis (ICMA 2015). 

While the Green Bond Principles are rather general, the CBI's Climate Bonds Standard specifies industry-specific qualification parameters to evaluate an asset's low-carbon value and suitability for issuance as a green bond. The Government of India received technical support from the World Bank's Sustainable Finance and ESG Advisory Services in order to launch the sovereign green bond programme. 

Dissection Of SEBI Guidelines And Circular On Sovereign Green Bond And Greenwashing

To address ambiguities in sovereign green bonds, SEBI issued a circular on 6 February 2023, outlining initial disclosure requirements. The Department of Economic Affairs also issued a framework detailing project evaluation and fund management processes. SEBI introduced additional guidelines on 4 May 2023 to strengthen measures against greenwashing. The circular emphasized disclosure requirements and transparency measures, holding stock exchanges accountable for monitoring updates. Despite SEBI's efforts to regulate green bonds and combat greenwashing, there are several areas where loopholes persist, like a lack of specificity for sovereign green bonds,  monitoring and enforcement challenges, and inadequate verification of green credentials.

Suggestions to Further Solidify The Existing Framework

The growing global trend towards sustainable finance has accelerated the issuance of sovereign green bonds. In addition to drawing in eco-aware investors, these bonds give governments a strong instrument to carry out their promises to combat climate change and promote sustainable development.  A global reporting database for sovereign green bonds is important for building a robust system of these bonds. The database will provide a centralised spot for aggregating data, thereby improving the comprehensiveness of the information available about sovereign green bond issuance, impact, and Use of Proceeds (UOP).  A new dedicated body overseeing the disbursement and subsequent use of proceeds for sovereign green bonds could tremendously enhance the effectiveness of reporting, it would simplify the collection of data and verification processes, minimising new errors or discrepancies; and confirm the integrity and correctness of UoP. 

CICERO, a widely recognised independent external review agency, while reviewing the Indian framework on Sovereign Green Bonds, highlighted certain pitfalls in the model that included project selection criteria. The Second Party Opinion (SPO) is concerned that the framework would encourage investments in solid biomass, biofuels, and bioenergy plants that carry intrinsic dangers to the climate. In order to address the same, a deliberate reorganisation of project assessment and selection standards is necessary. Clearer rules with defined cutoff points can mitigate funding for harmful projects. In the present state, we can see that more than three-quartersthree quarters of issuers provide some form of impact reporting. However, there is little uniformity, as there are more than 200 metrics that are being reported. 

Only 15% of reporting is produced by an established impact reporting framework: we considered the IFI Harmonized Framework or the Nordic Public Sector Issuers Position Paper. A better impact reporting system can be established, and this issue can be addressed by taking a few crucial actions. Adopting globally recognised standards or criteria for impact reporting, such as the Nordic Public Sector Issuers Position Paper or the IFI Harmonised Framework, is crucial. These frameworks offer standardised methods for calculating and disclosing environmental effects and emissions.

Moreover, a standard metric also needs to be applied for reporting CO2 and other GHG emissions. This can be implemented by adopting standards and procedures for reporting emissions set by the Intergovernmental Panel on Climate Change (IPCC), such as the Greenhouse Gas Protocol. A standard metric can enable comparative assessment of environmental outcomes across different projects and jurisdictions. Second, increased transparency and disclosure requirements can promote assurance – that is, issuers provide relevant and adequate information on the environmental outcomes of their project. Third, programmes for technical assistance and capacity development can be provided to help issuers implement best practices for impact reporting. Improving the impact reporting mechanism in sovereign green bond programmes would increase the transparency, comparability, and reliability of their environmental reporting processes, and align their reporting with international standards. This could enhance the trust of investors, improve informed decision-making, and incentivise more funding into projects and programmes.

Conclusion

Sovereign Green Bonds (SGBs) are a step in the right direction toward making the system of finance more sustainable, but a careful analysis of the potential for greenwashing, along with consideration of the legal complexities in dealing with SGB, is necessary as India tries to negotiate its commitments in trade, and in dealing with climate change. These actions reflect an effort to progressively incorporate sustainable finance into the economy of India. However, the noticeable lack of standardised criteria and lax enforcement procedures creates a system where even sophisticated participants could, at best, claim that they are following the rules, if not doing serious harm by interrogating the process through which these programmes are designed. The frameworks for sustainable finance on a global scale, such as the Green Bond Principles (GBP) and Climate Bonds Initiative (CBI), help provide directions to stakeholders. But, without standardisation, commerce across borders remains stymied. To sum things up, despite SGBs’ potential in fuelling India’s sustainable development, it is imperative to overcome barriers and other concerns such as greenwashing.