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During the COP26 summit in Glasgow, India set an ambitious target to achieve net-zero by 2070.
For faster phasing-in of renewable energy, there is a need for financing the climate transition. Green debt instruments are playing a crucial role in this endeavour. However, there is also a need to provide the capital necessary for industries to finance the shift from high-carbon to low-carbon operations. This will lead to cleaner industrial operations. In this regard, transition bonds merit attention. While there exists a wide variety of green debt instruments, they are all typically used to fund projects that are already environment-friendly or have identified environmental benefits.
Transition bonds, a sub-set of green bonds, are of particular significance as they can support the gradual shift of industries like steel, cement, and oil and gas, which are traditionally heavy emitters of carbon dioxide, thereby facilitating businesses in making a smooth transition from their current high-carbon operation to their future low-carbon goals. The uses of the proceeds from these bonds can include funding improvements in existing energy infrastructure to make it compatible with renewable energy sources such as wind or solar energy as well as funding energy efficiency measures that reduce overall energy demand.
Lacunae in framework
The Securities and Exchange Board of India, vide circular ‘Additional requirements for the issuers of transition bonds’, issued in May 2023, has set out regulations that govern the issuance and trading of transition bonds, disclosures regarding transition plans and progress in the implementation of such plans. However, there are still issues concerning the lack of a well-defined framework and terminology.
It is the need of the hour to create a standardised framework which will make it easier to identify, support, and invest in projects that align with national and global climate transition goals. This includes clearly defining what constitutes a transition project and the criteria for evaluating the environmental impact of projects. Additionally, the projects financed through these bonds must contribute to India’s net-zero target.
Such a framework is essential for allaying concerns regarding green-washing and transparency. This will inspire greater confidence in the green credentials of transition projects and encourage greater participation from private investors and consequently companies in climate transition-related initiatives. The announcement in the Budget this year regarding the development of a climate finance taxonomy is a vital step in this direction. It will provide a fillip to the green finance market in India.
At this juncture, it is apposite to point towards the Japanese example of transition bonds. The Japanese government issued its first tranche of climate transition bonds earlier this year in February, which are expected to bring in private sector investments in carbon-intensive industries and fund decarbonisation initiatives.
For transition bonds and transition finance to be successful, they must be supported by strong policy frameworks and adequate financial mechanisms.
Goswami is Director – Public Policy, Rathore is Senior Associate, and Nargas is Associate, Cyril Amarchand Mangaldas
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Published on September 12, 2024
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