The inclusion of 30-year sovereign green bonds in the central government’s borrowing schedule for the second half of the current financial year could attract interest from insurance companies, but not commercial banks, due to regulatory mandates.
In January, the Insurance Regulatory and Development Authority of India (Irdai) categorised investments in sovereign green bonds as “Investment in Infrastructure” and labelled them as “Central Government Securities.” Churchil Bhatt, Executive Vice President at Kotak Life Insurance, stated, “Insurance companies have to invest a minimum of 15 per cent of their life fund assets under management (AUM) in the ‘infrastructure and housing’ category as defined by Irdai. Given that green bonds qualify for this category, insurance companies will be natural buyers.”
On the other hand, the absence of any Environmental, Social, and Corporate Governance (ESG) mandate means that commercial banks are unlikely to invest significantly in these green bonds.
The central government aims to raise Rs 20,000 crore through this issuance, comprising 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 that aim to reduce 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. “Institutions can buy them on their own, giving some credence to their environmental responsibilities, but we haven’t seen any end-investor mandates like those in many Western countries,” Singh added.
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, declined from 6 basis points in the first tranche to just 1-5 basis points in the second.
A lack of trading activity in the secondary market for these bonds has been cited as an issue by market participants, attributing this 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, stating it has led to a relative lack of liquidity in these securities.
However, a section of the market speculates that foreign portfolio investors might demonstrate significant demand for these bonds.