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Memo on green bonds

  • November 17, 2020
  • Posted by: indiozconsultants
  • Category: Uncategorized
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Introduction:

In 2008, the World Bank launched the “Strategic Framework for Development and Climate Change” to help stimulate and coordinate public and private sector activity to combat climate change. The said initiative is an example of the kind of innovation the World Bank is trying to encourage within this framework.

Green Bonds in India:

The Securities Exchange Board of India (‘SEBI’) (Issue and Listing of Debt Securities) Regulations, 2008(‘SEBI ILDS Regulations’) govern public issue of debt securities and listing of debt securities issued through public issue or on private placement basis, on a recognised stock exchange. In addition to the above, the SEBIin its Circular[1] of 30 May 2017 issued the regulatory guidelines regarding the disclosure requirements for issuance and listing of Green Debt Securities (‘Circular’).

Definition of “Green”

The Circular defines the term “Green” or “Green Debt Securities” in the following manner:

“A Debt Security shall be considered as “Green‟ or “Green Debt Securities‟, if the funds raised through issuance of the debt securities are to be utilised for project(s) and/or asset(s) falling under any of the following broad categories:

  1. Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology etc.
  2. Clean transportation including mass/public transportation etc.
  3. Sustainable water management including clean and/or drinking water, water recycling etc.
  4. Climate change adaptation
  5. Energy efficiency including efficient and green buildings etc.
  6. Sustainable waste management including recycling, waste to energy, efficient disposal of wastage etc.
  7. Sustainable land use including sustainable forestry and agriculture, afforestation etc.
  8. Biodiversity conservation

Any other category as may be specified by Board, from time to time.”

The above definition is in line with the Concept Paper issued by SEBI in December 2015[1]. Internationally, Green Bond issuances are largely guided by standards issued by various developmental agencies. The Climate Bonds Standards issued by the Climate Bonds Initiative is the widely accepted one.

Independent reviewer/ certifier

Internationally, for all issuance of Green Bonds or Climate Bonds, an independent reviewer/ certifier has to be appointed mandatorily who certifies whether the targeted project assets qualify to be eligible assets or not. However, as per the Circular of disclosure requirements mentioned below for any issuance of Green Debt Securities in India, the issuer may use its discretion to appoint an independent reviewer/ certifier and it is not a mandatory requirement. There is no deviation from the Concept Paper in this regard.

Disclosure requirements

In order to issue Green Debt Securities, in addition to compliance with the provisions of SEBI ILDS Regulations, the following details shall also have to be disclosed in the offer document:

  1. A statement on environmental objectives of the issue of Green Debt Securities;
  2. Brief details of decision-making process issuer has followed/would follow for determining the eligibility of project(s) and/or asset(s), for which the proceeds are been raised through issuance of Green Debt Securities. An indicative details to be provided is as under:
    1. Process followed/ to be followed for determining how the project(s) and/or asset(s) fit within the eligible green projects;
    2. The criteria, making the project(s) and/or asset(s) eligible for using the Green Debt Securities proceeds; and
    3. Environmental sustainability objectives of the proposed green investment.
  3. Details of the system/procedures to be employed for tracking the deployment of the proceeds of the issue.
  4. Details of the project(s) and/or asset(s) or areas where the issuer, proposes to utilise the proceeds of the issue of Green Debt Securities, including towards refinancing of existing green project(s) and/or asset(s), if any.
  5. If the issuer appoints an independent third party reviewer/certifier, for reviewing /certifying the processes including project evaluation and selection criteria, project categories eligible for financing by Green Debt Securities, etc. then such appointment of such reviewer/ certifier shall have to be disclosure in the offer document.

These disclosures requirements are similar to that prescribed under international principles andas recommended by International Capital Market Association (‘ICMA’). Apart from the initial disclosures, the following details have to be disclosed on a continuing basis in the Annual Report or financial results:

  1. Details to be provided in the half-yearly and annual financial statements:
    • Utilisation of the proceeds of the issue, as per the tracking done by the issuer using the internal process as disclosed in offer document/disclosure document. The utilisation of the proceeds shall be verified by the report of an external auditor, to verify the internal tracking method and the allocation of funds towards the project(s) and/or asset(s), from the proceeds of Green Debt Securities.
    • Details of unutilized proceeds.
  2. Details to be provided in the annual report:
    • List of project(s) and/or asset(s) to which proceeds of the Green Debt Securities have been allocated/invested including a brief description of such project(s) and/or asset(s) and the amounts disbursed. However, where confidentiality agreements limit the amount of detail that can be made available about specific project(s) and/or asset(s), information shall be presented about the areas in which such project(s) and/or asset(s) fall into.
    • Qualitative performance indicators and, where feasible, quantitative performance measures of the environmental impact of the project(s) and/or asset(s). If the quantitative benefits/impact cannot be ascertained, then the said fact may be appropriately disclosed along with the reasons for non-ascertainment of the benefits/impact on the environment.
    • Methods and the key underlying assumptions used in preparation of the performance indicators and metrics.

In addition to the above, if the issuer of the Green Debt Securities or any agent appointed by the issuer follows any globally accepted standards, then such shall also have to be disclosed in the offer document of the securities.

Responsibilities of the issuer:

In addition to the responsibilities entrusted on the issuer of debt securities under SEBI ILDS Regulations, the following additional responsibilities have been entrusted upon the issuers of Green Debt Securities under the Circular:

  1. The issuer must maintain a decision-making process which it uses to determine the continuing eligibility of the project(s) and/or asset(s), which would include, without limitation, a statement on the environmental objectives of the Green Debt Securities and a process to determine whether the project(s) and/or asset(s) meet the eligibility requirements;
  2. The issuer must ensure that all project(s) and/or asset(s) funded by the proceeds of Green Debt Securities, meet the documented objectives of Green Debt Securities;
  3. The issuer utilise the proceeds only for the stated purpose, as disclosed in the offer document.

The aforementioned responsibilities are in line with the responsibilities entrusted upon the issuers of Green Bonds or Climate Bonds internationally, either directly or indirectly, under the Climate Bonds Standards.

[1]https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html

[1] https://www.sebi.gov.in/sebi_data/attachdocs/1449143298693.pdf