The central government’s borrowing schedule for the second half of the current financial year includes the introduction of 30-year sovereign green bonds. This move is likely to attract interest from insurance companies, but not commercial banks, due to regulatory mandates.
In January, the Insurance Regulatory and Development Authority of India (Irdai) classified investments in sovereign green bonds as “Investment in Infrastructure” and labeled them as “Central Government Securities.” Churchil Bhatt, Executive Vice President at Kotak Life Insurance, stated that insurance companies are required to invest a minimum of 15% of their life fund assets under management (AUM) in the “infrastructure and housing” category defined by Irdai. Since green bonds qualify for this category, insurance companies are expected to be natural buyers.
On the other hand, commercial banks are unlikely to invest significantly in these green bonds due to the absence of any Environmental, Social, and Corporate Governance (ESG) mandate.
The central government intends to raise Rs 20,000 crore through this issuance, with Rs 10,000 crore in 30-year green bonds and an additional Rs 5,000 crore each in bonds with five- and ten-year maturities. The proceeds will be allocated to public sector projects aimed at reducing the carbon footprint of the economy.
Naveen Singh, Head of Trading & Executive Vice President at ICICI Securities Primary Dealership, noted that there is currently no strong ESG mandate driving demand for these bonds. Singh added that institutions can buy them on their own to demonstrate their environmental responsibilities, but there haven’t been any end-investor mandates like those seen in many Western countries.
In the previous financial year, the government raised Rs 16,000 crore through two tranches of green bonds with 5-year and 10-year maturities. The ‘greenium,’ or the premium that investors are willing to pay for green bonds due to their environmental impact, decreased from 6 basis points in the first tranche to just 1-5 basis points in the second.
The lack of trading activity in the secondary market for these bonds is a concern for market participants, who attribute this issue to the absence of incentives for banks to invest in green bonds.
A report by Nomura expressed disappointment at the government’s sporadic issuance of green bonds, noting that it has resulted in a relative lack of liquidity in these securities.
However, there is speculation that foreign portfolio investors might demonstrate significant demand for these bonds.