India Firms Raise Over $4 Billion In Sustainable Bonds Overseas In 2021

Green fence in front of chimneys. (Photographer: Andrey Rudakov/Bloomberg)

India Firms Raise Over $4 Billion In Sustainable Bonds Overseas In 2021

Funds raised by Indian firms via sustainable bonds issued in the overseas market have seen a sharp spike in 2021. This, as globally, financiers look to back companies moving towards more responsible business practices.

Ten Indian firms have raised $4.64 billion via sustainable bonds so far this year, a five-fold jump from $950 million raised by just two firms in all of 2020, data from Refinitiv, a London Stock Exchange Group business, shows. In 2019, $3 billion in such bonds were raised by Indian firms in the offshore markets.

Sustainable bond issues have made up over 60% of total external commercial borrowings of close to $7.4 billion so far this year.

“Indian companies are getting increasingly conscious of the strong global shift towards sustainable investing, which became even more prominent during the pandemic,” said Pramod Kumar, managing director and head of banking—India at Barclays Investment Bank.

The lure of sustainable debt, said Kumar, is growing among companies across the world as ESG is becoming an important decision-making factor for investors and shareholders, while global fund allocations towards ESG-compliant companies are also rising rapidly.

Sustainable and sustainability-linked bonds could hit $8 to $10 billion by the end of this year and comprise half of total external commercial borrowings, Kumar estimates.

Agreed Chetan Joshi, head of debt financing at HSBC India. "Given the sectors that are dominating offshore fundraising from India, we would expect ESG to potentially comprise a majority of all US dollar bond financings during 2021," he said.

Globally, $559 billion in sustainable debt has been raised so far this year compared to $542.7 billion in all of 2020.

Who Are The Issuers

Of these funds raised via sustainable bonds so far this year, about 91% were environment, social and governance or ESG bond issuances.

  • Seven were green bond issuances, where proceeds went exclusively towards financing or refinancing of green projects, such as renewable energy, clean transportation, sustainable water management and green buildings.

  • Two were social bonds for financing of social-impact projects such as affordable housing and affordable finance.

  • One was a sustainability-linked bond, raised by Ultratech Cement Ltd, that is linked to achieving pre-determined sustainability performance targets.

The companies that raised sustainable debt via offshore bonds during the year include Greenko, ReNew Power, JSW Hydro Energy, India Green Power Holdings, Shriram Transport Finance Co. and UltraTech Cement Ltd., among others.

There is a natural fit between certain sectors that are big issuers of dollar bonds out of India and the ESG theme, said Joshi.

For example, the renewable sector has adopted this theme widely, and so have certain parts of the financials segment. These are all sectors that are also quite favorably positioned with global investors. To that extent, the ESG theme overlaying them. helps make these issues even more appealing to investors.
Chetan Joshi, Head Debt Financing, HSBC India

Sustainability-Linked Bonds

Sustainability-linked bonds are also slowly gaining traction among Indian issuers. Ultratech Cement has already issued such bonds this year and Adani Electricity Mumbai Ltd. is close to launching its bond.

SLBs are different from sustainable or ESG bonds as their proceeds are not used, fully or partly, to fund environmental or social-impact projects but for general corporate purposes. However, SLBs have covenants, such as linking the coupon of a bond to achievement of select sustainable development performance targets. Failure to meet these targets may trigger an increase in the coupon rate.

For instance, Adani Electricity Mumbai is considering a $300-million 10-year sustainability linked bond. The sustainability performance target here is linked to the company achieving at least 60% of renewable power in its procurement mix by the end of fiscal 2027. A reduction in greenhouse gas emission by 60% by end of fiscal 2029, compared to FY19 is another target.

If Adani Electricity fails to achieve these targets, it would lead to a 0.15% increase in the rate of interest every year, according to a second-party opinion by V.E, part of Moody’s ESG Solutions.

Similarly, Ultratech Cement raised $400 million 10-year sustainability-linked notes at a 2.80% coupon rate that have an interest rate step-up provision (75 basis points per annum) if the company fails to achieve certain sustainability performance targets around reducing its business' carbon intensity, as per a Feb. 8 note by S&P Global.

Globally, SLB issuances are gradually gaining traction since 2019, but in India they were used to raise debt for the first time this year. “As we move along, SLBs will help deepen the sustainable debt market as it increases the ability of a broader set of corporate entities to access ESG-dedicated funds globally,” said Kumar.

"Both SLBs and 'Use of Proceeds' bonds are important instruments for Indian companies raising sustainable debt," Joshi said. "We do expect a continued growth in the variety of sectors and issuers out of India who seek to use these instruments to access pools of international capital."

Companies Better Prepared

What is supporting the ability of Indian firms to tap into the global sustainable financing theme is that the necessary processes have been put in place over the past few years.

Over the past two years, there has been significant progress made by leading Indian companies in seeking support from consultants in improving their ESG quotient, incorporating ESG-related information in their annual disclosures, and implementing board-approved policies for reducing their carbon footprint, said Rahul Prithiani, director at Crisil Research.

“The trend is more dominant among larger Indian corporates across sectors, who are seeing greater shareholder value in strengthening their ESG quotient, besides improving their access to global capital,” he said.

As of March, there were 4,524 global sustainable funds with ESG assets worth $37.8 trillion. Comparatively, India remains a nascent market with just 10 ESG funds as of March that held $1.4 billion in assets under management, a July 8 Crisil report said.

"Issuing ESG bonds does require setting up frameworks for such financing, which also capture reporting requirements for investors," Joshi said. "We're seeing increased engagement by companies in both understanding these requirements as well as complying with them as they move forward and issue."

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