2022 to be blockbuster year for India Inc's ESG bonds: Anjan Agarwal

More than 50 Indian companies have signed up to the global Science Based Target initiative in order to cut emissions of greenhouse gases

It has been an exceptional year for global debt capital markets primary issuance with considerable growth in ESG bonds. Global & Asia ex-Japan G3 ESG bonds supply this year hit all-time record levels at $528.5 billion and $70.8 billion (YTD 2021), respectively. While Asia’s share of global ESG bond supply lags that of the US and Europe, it is encouraging to witness an almost three-fold increase in volumes coming out of the region versus that of the whole of last year ($22.9 billion).
 
G3 ESG bonds issued out of India showed a similar trajectory with $9.4 billion worth of ESG bonds issued YTD 2021 against $1.3 billion in the full year 2020. This volume represents almost 44 percent of the total $21.2 billion bond issuance out of India YTD (as compared to 20 percent for Asia (ex-Japan)—a clear reflection of how India has been at the forefront. The trend is expected to continue for both India and Asia, with JP Morgan’s research estimating ESG issuances out of Asia to reach up to $100 billion in 2022.

The rise of ESG financing has been meteoric and represents an irreversible structural change. The drive to improve sustainability, which comes from issuers, investors, suppliers or customers, the government, the regulators, NGOs and the public, means that ESG considerations are only going to grow in significance—beyond the annual review to structuring or transforming day-to-day activities. It’s no longer a push or a pull initiative among the stakeholders but a wholesome approach whereby each stakeholder appreciates the importance of ESG in combating climate change and undertaking necessary actions to implement an effective ESG framework and strategy.

While over the past few years there has been a growing interest in ESG financing products with a focus on sustainability, over time that has extended to social issues as well. At the COP26 summit in 2021, India pledged to cut its emissions to net zero by 2070, increase energy from renewable resources to 50 percent, reduce total projected carbon emissions by 1 billion tonnes, and emissions intensity of GDP by 45 percent by 2030. Further, India’s regulators and firms have stepped up their efforts to focus on ESG reporting. In 2021, the Securities and Exchange Board of India (Sebi) mandated new disclosure requirements for sustainability related reporting for the top 1,000 listed companies by market cap by FY2023.

More than 50 Indian companies have signed up to the Science Based Target initiative (SBTi), a global non-profit organisation that drives climate action in the private sector. These targets show companies how much and how quickly they need to reduce their greenhouse gas (GHG) emissions to prevent the worst effects of climate change.

The investor community is also expected to increasingly focus on companies that are putting together robust transition plans to get to net zero emissions. They will increasingly differentiate between companies based on the robustness and credibility of their transition plans and expect such commitments to be broad-based and driven at the CXO and board level.



Global investors have not only launched dedicated ESG-focussed funds but also look to integrate ESG in their overall investment portfolios. For example, all of Blackrock’s active portfolios and advisory strategies are fully ESG integrated and 100 percent of Nuveen’s (a Teachers Insurance and Annuity Assurance of America company) assets are committed to UN Principles for Responsible Investing. Such dedicated ESG funds/investors are capable of subscribing to a substantial portion of any proposed bond issuance and tend to put in large orders to get higher allocation. Orders from these investors tend not to be traded frequently, if at all, and are typically held to maturity, which translates to order book momentum and improved pricing.
 
In order to align investments in ESG bonds with their ESG focussed fund objectives and reporting, investors expect ESG bonds to be validated by independent third parties. ESG bonds fall into two broad categories—use of proceeds, and key performance indicator (KPI) linked. In the former, issuers allocate the proceeds of bonds for specific ESG projects—for example green bonds, social bonds, blue bonds, Covid-19 response, sustainability bonds. Under the KPI-linked structure, the issuer commits to meet certain ESG targets within the bond’s life that needs to be relevant as well as ambitious for that issuer—nonfulfillment of which would result in coupon step up(s). Examples of such bonds include transition bonds or sustainability-linked bonds (SLBs) whereby, for example, an issuer would commit to an ambitious reduction in its carbon emissions or increase renewable power consumption over the course of the bond’s lifetime.

The most common ESG bonds are green, sustainable or SLBs. The process of defining them involves establishing a framework that meets international standards, a Second Party Opinion from a ESG specialist and assurance from an independent third party. The framework is based on the Green Bond and Social Bond Principles issued by the International Capital Market Association. The Green Bond and Social Bond Principles promote integrity in the green and social bond market through guidelines and recommendations around transparency, disclosure and reporting.

Historically, India’s issuers have focussed on green bonds, predominantly from the renewable sector. However, in recent years we have witnessed the emergence of new types of ESG bonds such as social bonds and SLB. Of the total $9.4 billion ESG bond issuances from India in 2021, 70 percent has been green bonds, 13 percent has been SLBs, with the rest being almost equally split between social and sustainable bonds.

India’s renewable companies raised a record $6.1 billion in the offshore debt capital market in 2021, with several debut Indian renewable issuers. For example, Greenko raised the largest single tranche offshore green bond offering at $1 billion by an Indian renewable group. UltraTech issued the first SLB out of India with a $400 million maiden issue in February. We also saw social and sustainable bonds being issued offshore by Indian financial institutions. Axis Bank’s $600 million AT1 capital issuance marked the first sustainable USD bond out of the banking sector whereas Shriram Transport Finance raised $725 million through a social label.

We expect Indian corporates to tap the US$ debt capital markets with ESG bonds. The renewable energy sector is expected to be at the forefront, driven by the government’s target of reaching 450 GW of renewable electricity capacity by 2030. Further, JP Morgan research estimates that transmission, solar equipment and storage are expected to see investments supporting renewable expansion. As more companies focus on reducing their carbon footprint and set targets to achieve net zero emissions, we expect a surge in SLBs issuances with KPIs being set in accordance to companies’ overall targets.

At JP Morgan, we are committed to advancing the transition to a low-carbon world through our Net Zero Banking Alliance membership; Paris-aligned strategy—including 2030 carbon reduction targets for critical sectors; $2.5 trillion, 10-year sustainable development financing target; and a commitment to achieve carbon neutrality in our operations every year, starting in 2020.
 
The writer is executive director, JP Morgan India