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Explainer: Sovereign Green Bonds in India

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India’s initiative to introduce the concept of sovereign green bonds with the objective to decarbonise the economy by funding public infrastructure projects directed towards an environmental cause is commendable. Such projects may include renewable energy, green buildings, clean modes of transportation and so on. Recently, the Finance minister, Nirmala Sitharaman, during the budget speech for the union budget 2022-23 announced that with the issuance of sovereign green bonds, their proceeds shall be used in public sector projects which will effectively help in ameliorating the carbon intensity of the economy. It was further stated that these will be purpose-oriented borrowings for which a framework shall be curated by RBI to qualify the funding under sovereign green bonds.


The questions that might arise in the minds of the readers are what are green bonds and why is there a desideratum to use them? To state simply, green bonds (first issued in 2007) are borrowings and securities issued by the government or corporates and are used to fund and finance the debts of the government. It is similar to other debt instruments wherein the investors buy these bonds and provide the principal amount needed by the issuer. In return, they receive the interest upon the maturity of the bonds. Then what really distinguishes green bonds from other types of conventional bonds? Succinctly put, in the case of green bonds, the issuer pledges to deploy the raised amount towards financing projects which have an affirmative contribution to the environment. In other words, the proceeds are earmarked for green projects. A green bond is also distinguished from a regular bond by being labelled or designated as “green” by the issuer or another entity, wherein an obligation arises to use the proceeds of green bonds (principal amount) in a transparent manner, and primarily to finance or re-finance “green” projects, assets or business activities with an environmental benefit. The rising popularity of green bonds emanates from the fact that it has enabled investors to embrace socially responsible investments. Certain advantages of green bonds are also attributed to its rising growth such as the offer of tax incentives including tax exemption and credits.


The green bond market can offer myriads of important benefits such as firstly, rendering an additional source of green financing. As traditional ways of debt financing will not be enough considering the immense green investment needs, there is a requirement to introduce novel methods of financing which help in leveraging a wider investor base. Secondly, it can enable long-term green financing by acknowledging and rightly addressing the maturity mismatch. Thirdly, it can enhance the issuer’s reputation by clarifying its environmental strategy. Fourthly, it can offer significant cost advantages. Fifthly, it can accelerate the ‘greening’ of traditionally brown sectors and make the newer green fiscal products available to responsible investors. As far as their need in India is concerned, it is to be noted that our economy is the third biggest carbon emitter in the world and therefore, the proposal to issue such sovereign green bonds to finance green infrastructure seems to be a welcoming move. Moreover, India has set ambitious renewable energy goals to improvise its stance on energy access and security while taking action on climate change. In order to scale the required finance to achieve these targets, the need to scale up new financial instruments like green binds has been felt. The objective to strengthen the market of green bonds has majorly stemmed from India’s need to expand/diversify the issuer and investor base, encourage demand from institutional/retail investors and minimise the cost of capital.


Furthermore, there are several compliances required to qualify bonds as green bonds. To qualify as Green bonds, the International Capital Market Association (ICMA) in the ambit of its Green Bond Principles (GBPs) recommends four cardinal principles to be complied with, which include the following: (a) proceeds must be used for green projects; (b) they must indicate the process adopted for project evaluation and selection; (c) they must maintain transparency in the management of proceeds, and (d) they must enable reporting of information pertaining to the use of the proceeds. In India, SEBI initiated a full-fledged consultation process pertaining to disclosure requirements for the listing of green bonds and privately placed green bonds.


It was only in the year 2015 that India ventured into the green bond market with the issuance of the first green bond by YES bank. Globally, the market of green bonds has been rapidly proliferating over the years as nations around the world have been stepping up their efforts to mitigate carbon emissions. Such an escalating growth is evident from the fact that in October 2021, the European Union issued about $14 billion of these bonds and the money raised from it is expected to support projects involving a research platform for the transition of energy in Belgium and wind power plants in case of Lithuania. Around 2023, according to the climate bonds initiative, the annual issuance of green bonds is expected to hit $1 trillion which can be a big milestone. Presently, more than 50 countries have issued green bonds out of which the United States constitutes the largest source of green bond issuances.


Issuing sovereign guarantees to green bonds primarily sends a robust signal of intention around climate action and sustainable development to the government and other regulators. It will help in effectively catalysing the development of the domestic market and offer impetus to institutional investors. Moreover, benchmark pricing or liquidity or demonstration effect can be rendered to local issuers with the aim to support the growth of local markets. IEA’s World Energy Outlook 2021 estimates that 70% of the additional USD 4 trillion expenditure is needed to achieve the level of net zero in developing nations. Sovereign issuances can also help in kickstarting such large inflows of capital.


To conclude, green bonds in India are basically proceeds being deployed in public sector projects to ensure that we can achieve our goal of net-zero carbon emissions by 2070. However, certain suggestions to make this process efficient can be culled out in three ways. Firstly, India can take inspiration from the French model by assigning a green coefficient to each budget line during the budgeting process depending on how green the expenditure is relative to the six environmental priorities listed by the European Union. (These include climate change mitigation, water management, circular economy, pollution, biodiversity and climate change adaption). Secondly, harmonisation of international and domestic guidelines along with standards is imperative to develop a stronghold over the green bond market. At times, when taxonomies might turn antithetical to a cross border green bond market, homogeneity can be considered in constituting green investments. Lastly, the emergence of certain barriers to entry to this market and scaling up of green bonds are inevitable and apt capacity building initiatives for issuers in emerging markets can be seen as a spectacular way to spread knowledge on the benefits and procedures related to green bonds.


Author: Jasleen Bedi

Editor: Khushi Jaiswal

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