India Inc set to raise $3 bn through green, ESG issuances by December

After a brief hiatus in 2020 due to the Coronavirus (Covid-19) pandemic, Indian companies are hitting bond street to raise funds via green and environment, social, governance (ESG) issuances, raising over $6 billion so far in 2021, with another $3 billion in the pipeline by the end of the year, bankers involved with such transactions said.

Power Finance Corporation (PFC) is planning to come up with Euro denominated green bond issuances, and has appointed bankers including Barclays, Standard Chartered, for investors in Europe and Asia. Last week Adani Green Energy Ltd raised $750 million via green bonds through a three-year issuance at a fixed coupon of 4.375 per cent. The issuance was oversubscribed by 4.7 times.

Since the first green bond issuances by Exim Bank in 2015, activities around ESG and green funding have picked up, particularly in the last three years. According to bankers, the amount of money which is chasing these ESG and green deals has gone up significantly, and as a result, there is a price advantage too.

Indian companies have raised $4 billion through ESG and Green bonds in 2019, $1.4 billion in 2020 and over $6 billion in 2021 so far. Globally, ESG loan issuance have surged, growing over three times in the last three years. In all, the total amount of green loans, credit supply since 2006 is around $1.3 trillion, of which $1 trillion has come from 2016 alone.

“The green bond phenomenon in the last three years was mainly driven by renewable energy. The renewable energy in the country has grown, its requirement for funding has also grown,” said Hardik Dalal, managing director, and head, Loans and Bonds, Barclays Bank India.

“On the base case, at least $ 2 billion would be raised and on the upside. It can even go up to $3 billion by the end of the year,” Dalal told Business Standard in an interaction when asked about the pipeline of such issuances.

One of the reasons why issuances of green bonds by companies have gone up is the green power generation target of the government, which is to have 450 GW of renewable energy capacity by 2030. At present, India produces around 150 GW, so another 300 GW needs to be added in the next 9 years.

Around $1 billion of funding is required for generating every GW.

“You are looking at a $ 280 billion investment pool to achieve the green energy goal of India. These projects are funded with equity – debt ratio of 30:70. If you assume, 50% of the debt will come from Indian banks, another 50% or say $ 100 billion will come from international sources. This would be raised in a combination of bonds and loans,” said Sanjay Agarwal, head, India Corporates, Bank of America, while explaining the size of the opportunity.

“2020 was a tough year due to Covid-19, we only saw $ 1.5 billion of issuances. In the first three quarters of 2021, we have seen issuances of over $ 6 billion dollars, and the total for the year could be around $8 billion - $10 billion,” Agarwal said.

Other than renewable energy, Bank of America expects huge activity in the ESG space.

Earlier this month, Axis Bank – the third largest private sector lender in the country – raised $ 600 million ESG themed additional tier-1 (AT1) bonds from overseas investors – the likes of Blackrock and Fidelity. Bank of America was one of the merchant bankers for the deal.

Agarwal says companies planning to raise capital are not only positioning themselves as environmentally and socially conscious, but also making tangible commitments to certain ESG goals.

“When tangible commitments are made, investors recognise you as a responsible company from an ESG perspective. This translates into two things: one is from an equity market point of view – many global investors are focused on ESG, enabling issuers to attract a large pool of funds and that translates into higher equity valuations as compared to companies without ESG goals,” Agarwal said.

Secondly, from a debt perspective -- bonds and loans -- companies are able to push for better pricing, better terms and get pricing incentives linked to ESG goals, Agarwal said.

Barclays’ Dalal agrees and adds that higher credit rating is a necessary condition.

“A year or two years back, there was no price differential, ESG or non-ESG. It was only rating dependent. Today there is a difference given the market conditions, with 5-15 bps better pricing for a ESG issuance vs for a non-ESG issuance. This is like the general trend we have seen, that ESG issuances see good demand as you get good demand, you will see better pricing. But first the rating has to be right,” Dalal said.

“The pricing benefit for foreign currency green / ESG bonds may go up to 25 bps. Pricing is not only the primary driver but ability to access a larger investor base helps issuers to print sizeable deals,” Agarwal added.