Green finance has become increasingly popular in light of the urgent need to take concrete steps to tackle the behemoth of climate change. One such financial instrument that has come to the fore is green bonds. This article begins by examining the international standards for the issuance of green bonds. It analyses the regulation of the same across jurisdictions such as China and the EU, before turning focus to the regulatory framework for green bonds in India. The article concludes with suggestions to strengthen regulation in India so that the benefits of such an instrument can be adequately realised.
The recent Intergovernmental Panel on Climate Change (“IPCC”) report, Climate Change 2021: The Physical Basis (“Report”),  has raised alarm bells regarding the state of climate change and what it could entail for humanity in the short and long run. It was found that CO2 concentrations in the atmosphere were the highest they have been in the past 2 million years. Temperatures have been rising across the globe at a distressing rate: with temperatures between 2011-2020 exceeding those of the most recent multi-century warm period, which was around 6500 years ago. The Report has only reinforced the urgent need to take decisive and immediate steps to mitigate climate change and shift towards sustainable modes of living. This is particularly relevant in the Indian context, considering the dire predictions this Report makes regarding “extreme heatwaves” and pluvial floods that will affect India in the near future as a result of climate change. 
As a result of the burgeoning awareness surrounding environmental damage, green finance has become increasingly popular. In this backdrop, the time is particularly ripe to examine green bonds, a mode of sustainable finance that has come to the fore. The green bond market has boomed in India, with corporates and financial institutions raising increasing amounts through this instrument, with around USD 14.43 billion already raised in 2016 through green bonds.  Renewable energy projects have raised a record-breaking USD 3.6 billion in the first half of 2021 alone. 
So, what exactly are green bonds? According to the International Capital Market Association (“ICMA”), green bonds include any type of bond instrument, the proceeds of which are exclusively used to finance or re-finance new or existing green projects, in part or in full. Alternatively, an equivalent amount to the bond amount will be used to finance a green project.  As part of the green finance framework, green bonds help provide finance for investments that have tangible environmental benefits in furtherance of environmentally sustainable development. Green finance thus aims to “internalize environmental externalities” and “adjust risk perceptions”  by promoting sustainable projects.
Global Regulation of Green Bonds
The ICMA Green Bond Principles
At the outset, it would be useful to briefly examine the international yardstick on green bond issuances, i.e., the ICMA’s Green Bond Principles (“GBPs”), a voluntary framework that encapsulates best practices to be followed in the issue and use of green bonds.  These principles call for a high degree of transparency and disclosure in order to promote integrity in the green bond market.
The Principles consist of four core components: (i) use of proceeds; (ii) process for project evaluation and selection; (iii) management of proceeds; and (iv) reporting.
Since the key component of a green bond is the use of the proceeds flowing therefrom in an environmentally beneficial project, the GBPs require that the proceeds from the green bonds be used in green projects having clear environmental benefits that can be assessed (and quantified, if possible), by the issuer.  Issuers should adopt a rigorous process to evaluate and select projects and must convey to the investors how the projects are chosen and how the project’s goals align with the environmental sustainability objectives. The proceeds should further be tracked in an appropriate manner by the issuer to ensure that they are being managed appropriately towards the furtherance of the designated green project. Lastly, the issuers must keep up-to-date information on the use of proceeds, which should be regularly updated until the project is completed.
China’s Regulatory Approach
China became the first country to publish official rules governing the issue of green bonds in 2015, with the release of the Green Financial Bond Guidelines by the People’s Bank of China. Thereafter, the National Development and Reform Commission (“NDRC”) released their Guidelines on Green Bond Issuance, and the China Securities Regulatory Commission (“CSRC”) also published Guiding Opinions for Supporting the Green Bonds in 2017. The Chinese framework has been, by and large, in consonance with international best practices; in terms of its definitions of what constitutes a green project and its requirements for use of proceeds. Regulators have also instituted disclosure requirements over and above those governing corporate bonds, including the eligibility of the green projects, the expected environmental benefits accruing therefrom, the management of funds, and the arrangements for information disclosure. Further disclosures are required during the lifetime of the bond regarding the use of funds, the progress of projects and the progressive realisation of environmental benefits. Third-party evaluation is encouraged; however, there is no mandatory requirement for the same under the law. Thus, this element of the GBPs is also adequately covered in China’s regulatory framework.
However, the multiplicity of regulations and regulators has caused significant confusion. The applicable rules and regulator varies based on the type of issuer, which could cause reservations among investors.  Moreover, the NDRC Guidelines permit up to 50% of green bond proceeds to be used towards the repayment of bank loans and for general corporate operations. This provision is problematic as it goes against the grain of the use of proceeds principle, which functions on the requirement that the entire proceeds be channelised towards the green project. What is heartening, however, is a government-backed push towards more unified standards, which recently culminated in coal-based projects being removed from the green projects list. 
The European Union (EU) Framework
The EU has also emerged as a frontrunner in terms of the regulation of green bonds. The EU has been undertaking significant efforts towards sustainability in various sectors since the announcement of the Green Deal in 2019, and accordingly included the proposal for a European Green Bond Standard (“EUGBS”) in the Green Deal Investment Plan.  The Council has since published a legislative proposal on European green bonds (“EU Regulation”). The Standards are intended to be voluntary in nature, and the Commission has stressed that they represent the “gold standard” on how green bonds can be raised while following the rigorous sustainability requirements and protecting investor interests. 
The principles underpinning the Regulation closely mirror those in the GBPs. The EU Regulation requires that use of proceeds from the green bonds must align with the EU Taxonomy.  Thus, the proceeds from the green bond must be fully allocated towards a project that makes a “substantial contribution” to one of the six environmental objectives laid down in the Taxonomy Regulation,  and the activities undertaken must not significantly harm any of these objectives. The entire proceeds from the green bonds must be used for such activities. Thus, issuers looking to comply with the EUGBS would have to embed these environmental objectives in their strategy from the get-go. The Regulation also stresses on transparency and ensures the same through rigorous disclosure requirements that must be fulfilled. This includes the requirement of various documents, such as the green bond factsheet, pre and post-issuance external reviews, annual allocation reports and the impact report, being published on the issuer’s website throughout the life cycle of the bonds.
A significant feature of the Regulation is its focus on external review at various stages of the bond’s life. The issuer must conduct an external review at the pre-issuance stage to ensure that the green bond factsheet complies with the requirements of the EUGBS. A post-issuance external review is also required to ensure that the allocation of proceeds aligns with the EUGBS requirements. This must be done at least once upon the full allocation of bond proceeds. Moreover, the Regulation ensures that the external review market is well-regulated by requiring registration of external reviewers with the European Securities and Markets Authority (“ESMA”). The reviewers must also fulfil eligibility criteria. All these requirements are a step further from the GBP requirements, wherein pre- and post-issuance external review are merely key recommendations. Further, the regulation of the ESMA in this sector is a welcome development to ensure that external review under the Regulation is effective.
Reporting requirements are also stringent: issuers need to provide annual allocations reports until all the proceeds from the bond are allocated. Further, at least one impact report must be published. This is once again a step ahead of the GBPs, where this is only a key recommendation. These reporting requirements further enhance transparency in the green bond market and promote investor trust.
The formulation of the EUGBS is a welcome development that could expand the green bond market with increasing investor interest in this asset class.  The strictness of the standard can help mitigate the problem of greenwashing, as extensive review, reporting, and disclosure leave little room for the same. Moreover, the regulation of the external review process by the ESMA only adds to the robustness of the system. With proper implementation mechanisms, the EUGBS could become a global blueprint on best practices in green bond regulation.  However, the requirement of alignment to the EU Taxonomy could become a stumbling block to non-EU issuers looking to adopt the EUGBS.
Looking Closer Home: Analysing the Regulation of Green Bonds in India
In India, the Securities and Exchange Board of India (“SEBI”) highlighted the key features and benefits of green bonds in a concept paper in 2015.  Further, in a Memorandum in 2016, it recognised the significance of green bonds in fulfilling its intended Nationally Determined Contributions per the Paris Agreement and financing its ambitious renewable energy development plans.  The Memorandum recognises that the existing framework, the SEBI (Issue and Listing of Debt Securities) Regulations, 2008, is inadequate when it comes to the issue of green bonds. Thereafter, the SEBI released a Circular in 2017 on the disclosure requirements for issuance and listing of green debt securities.
The Circular contains an expansive definition of what constitutes green debt security, including securities where the proceeds therefrom would be invested in assets or projects considered as “green”. This included categories such as renewable and sustainable energy, sustainable water management, clean transport, climate change adaptation, energy efficiency, sustainable waste management, sustainable land use, and biodiversity conservation.  The SEBI is also empowered to include other categories of projects as it deems fit.
The Circular also lays down various disclosure requirements at the offer stage. This includes stating the environmental objectives behind the issue of the securities, as well as details of the decision-making process adopted in choosing the project or asset to allocate funds to.  The issuer must provide details of the projects or assets chosen, where the funds will be used. This must include any information regarding the use of proceeds for refinancing purposes.  Moreover, the issuer is required to disclose the mechanism adopted to track the deployment of proceeds towards the earmarked projects/assets. Independent review is made optional at the behest of the issuer. The SEBI justified this stance in its Memorandum by stating that there was a lack of adequate independent reviewers in this sector in India. Further, the international standards do not have a mandatory review requirement. 
There are also continuous disclosure requirements: issuers need to provide information regarding the utilisation of the proceeds, which must be verified by an external auditor.  Details of any unutilised proceeds must also be provided. Issuers are also required to provide details of the green projects in their annual reports, along with qualitative performance indicators of the environmental impact of the project/assets. Quantitative impact indicators are also encouraged, but in case such quantification is not possible, issuers can disclose the same along with reasons for such non-ascertainment. This information must be accompanied by the methods and underlying assumptions adopted in preparing the indicators. 
The steps taken by SEBI to formalise the disclosure requirements for green bonds are certainly valuable. It is clear that the regulator recognises the importance of these instruments and how they can help fill the financing gap for India’s sustainability needs. The renewable energy sector has already seen a significant boost thanks to regulatory developments, as the green bond market has become much more attractive to investors.  With the introduction of disclosure standards and continuous monitoring and reporting requirements, investor interest and trust in the market has grown.
However, a lot remains to be done. The definition of “green” under the Circular is extremely vague and opens the door to wide inconsistencies, as issuers have too much leeway to decide what constitutes a green project. This could potentially lead to a situation similar to what China faced recently, with the inclusion of “clean coal” projects under green projects, which is counterintuitive to the very raison d’être of green bonds. The lack of defined standards and taxonomy is a major problem. The EU regulatory framework provides useful guidance in this regard, as issuers looking to follow the EUGBS must comply with the EU Taxonomy as well, thus providing holistic, coherent regulation which removes any ambiguities in what constitutes an eligible green project. The Climate Bonds Initiative also has a detailed taxonomy that can be used as a reference point in developing this framework in India,  especially since the SEBI has itself recognised the suitability of this taxonomy in its Memorandum.  Similarly, India needs a coherent and comprehensive taxonomy and definitions to help remove inconsistencies in the interpretation of what constitutes a green bond. The setting of proper standards can also help in enhancing the comparability of bonds.
The review requirements are also quite lax. More stringent external review requirements could help increase the legitimacy of these instruments. It can also help mitigate the common problem of “greenwashing”.  The term was coined by Jay Westerveld in 1986 and is used to describe activities undertaken by organisations that are not as environmentally friendly as they are made out to be.  Recent incidents have shown that the problem of greenwashing pervades green bond issuances the world over.  Three Gorges has come under fire for its issuance of green bonds in Europe.  The issuer has been criticised extensively for its activities which have polluted water and damaged surrounding ecosystems, particularly in the case of the Three Gorges Dam in China.  GDF Suez issued green bonds to finance the Jirau Dam, which caused significant environmental damage through the flooding of a rainforest.  In India itself, Amundi recently removed exposure to State Bank of India (“SBI”) green bonds from its Planet Emerging Green One Fund. This is because SBI’s green bonds have been linked with the financing of the Carmichael thermal coal mine in Australia, which has been criticised heavily due to projected damage to the Great Barrier Reef. 
Such incidents highlight how important it is that the proceeds arising from green bonds be wholly channelised towards environmentally beneficial projects and assets, and robust review mechanisms can help ensure the same. Companies such as KPMG, Viego and Sustainalytics can perform second-party review; and the Climate Bonds Initiative also provides third-party certification.  Moreover, similar to the ESMA, regulation of the market for external reviewers can be done by the SEBI to enhance investor faith in the market. Such measures could provide a much-needed impetus to the green bond market in India while providing added credence to the instruments traded therein. Moreover, it will ensure that proceeds from green bonds are utilised for projects that actually benefit the environment and protect investor interests.
The Indian green bond market has grown considerably since the first issue of green bonds in 2015. The extent of investment in the market in the past year has shown that there remains immense untapped potential in this sector. Moreover, green bonds have emerged as a popular option to finance sustainable projects due to the cost benefits they offer. These instruments can be particularly helpful in infrastructure financing in India due to the benefits it offers over traditional models.  Proper regulatory measures can help India capitalise on the potential of green bonds. The development of proper standards and the enhancement of review requirements could give this nascent market a much-needed boost of credibility.
About the Author
Gautami Govindrajan is a graduate from National Law University, Jodhpur. She will be joining Linklaters as a Trainee Solicitor in 2022.
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Preferred Method of Citation
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