The Reserve Bank of India (RBI) issued India’s first sovereign green bonds at auction on January 25, 2023. The second issue will take place on February 9, 2023. These green bonds will be issued at a ‘greenium’ by the Indian government that yields below the prevailing market rates. The government is planning on raising Rs 16,000 crore through these green bonds in two tranches of Rs 8,000 crore each in the current fiscal ending March 31. The bank is issuing 5-year and 10-year sovereign green bonds of Rs 4,000 crore each.
What Are Sovereign Green Bonds?
A bond is a debt instrument in which investors lend their money to the bond issuer, such as governments, banks, nonbanking financial companies, and corporates. Thus, a green bond is a debt instrument through which capital is raised to fund various ‘green’ projects. These green projects generally are in the areas of renewable energy, clean transportation, sustainable water management and so forth. The issuer of these green bonds pledges to use the proceeds of bonds to finance those projects that will impact the climate and environment positively. The main aim of the green bond is to contribute to the planet and its sustainability.
Typically, a bond is a fixed income instrument representing a loan that is made by an investor to a borrower, such as corporate or governmental. A fixed interest rate is paid to bond holders.
Government’s Budgetary Initiative to Tap the Domestic Debt Market for Green Projects
In the 2022-2023 budget, Finance Minister Nirmala Sitharaman made an announcement of the government’s plan to issue sovereign green bonds. The green bond issue is an attempt by the third-largest economy of Asia to make use of the domestic debt market to finance green infrastructure projects of the country.
Who Can Issue Green Bonds?
Green bonds are issued by countries, corporates and multilateral organisations to only fund those projects that will make positive impacts on the climate and environment and provide bond holders with fixed income.
Green Bonds Differ from Standard Bonds in the End Use of Funds
The proceeds of the standard bonds can be used for various purposes depending upon the choice of the issuer, but in the case of green bonds, funds generated are used only for green projects that will benefit the environment. It is expected of green bonds’ issuers to provide information about the project with respect to impact to climate and environment, such as green construction and renewable energy.
The benefit to the Indian Economy of Sovereign Green Bonds
The Government of India will like to use the proceeds of the sovereign green bonds to be used in various environment-friendly public sector projects, which will eventually help to reduce the carbon intensity of the Indian economy.
The collected funds will be used for solar power projects, wind and small hydro projects and various other public sector projects. Green bonds will also provide an opportunity to the government to attain its target of achieving 175 gigawatt of renewable energy capacity by the end of 2022 and net-zero carbon emissions by 2070.
Authority of Green Finance Working Committee to Identify Projects and Allocate Funds
The government has established a green finance working committee that will select public sector projects that will be benefitted by green financing from those listed by government departments. The committee’s choice will depend upon the observations and the opinion of environment specialists and representatives from the ministry of environment, forests and climate change. Each year, the committee will identify new projects and will ensure that funds are allocated from the green bond within 24 months of the date of issuance.
Incentives to Attract Global and Domestic Funds for Green Projects
These two auctions of green bonds will indicate the appetite of Indian institutional investors towards such environmentally sustainable initiatives by the government. The government on its part has tried to make these bonds look attractive for institutional investors by giving incentives such as issuing them through a uniform price auction, making them qualify for statutory liquidity ratio and making them tradeable. NRIs are also allowed to invest in these green bonds. Also, the Securities and Exchange Board of India has provided disclosure norms for issuance and listing of green bonds.
