Green bonds: Finance Ministry clears framework

The Finance Ministry has finalized the framework to issue Sovereign Green Bonds (SGB).

• The plan to issue sovereign green bonds was announced in the 2022/2023 Budget as a part of overall market borrowing with the intention to use the funds to build green infrastructure.

Where the fund would be utilized?

• The bonds will focus on funding solar power projects, followed by wind and small hydro projects.
• The proceeds from green bonds will not be used to fund hydropower plants larger than 25 MW, nuclear projects, and any biomass-based power generation with biomass originating from protected areas.
• The government intends to mobilize Rs 16,000 crore from the issuance of green bonds during the second half of the current financial year.
• The government is planning a total borrowing of Rs 5.92 lakh crore during the October-March period of the current fiscal.
• The announcement is in sync with India’s commitment to achieving net-zero carbon emissions by 2070, made in COP26.

Situation so far:

• Corporations have been issuing green bonds in India for a few years in a growing market, but the country’s global share stood at just 1% in the first half of 2022.
• The sovereign push could lead the way toward more climate investment.
• A clearer regulatory intervention will be crucial as a next step in the direction.

Green Bond Framework:

• This Green Bond Framework (Framework) sets forth the obligations of the Government of India as a Green Bond issuer.
• The Framework applies to all sovereign Green Bonds issued by the Government of India.
• Payments of principal and interest on the issuances under this Framework are not conditional on the performance of the eligible projects.

• Investors in bonds issued under this Framework do not bear any project-related risks.
• Ministry of Finance reserves the right to modify this Framework according to international best practices; India’s international commitments and environmental priorities.
• The framework is designed to comply with four components and key recommendations of the International Capital Market Association (ICMA) Green Bond Principles (2021).

Significance of Sovereign Guarantee to Green Bonds

• Sovereign green issuance sends a powerful signal of intent around climate action and sustainable development to governments and regulators.
• It will catalyze domestic market development and provides impetus to institutional investors.
• It will provide benchmark pricing, liquidity, and a demonstration effect for local issuers, helping to support the growth of a local market.
• With the IEA’s World Energy Outlook 2021, estimating that 70% of the additional USD 4 trillion spending to reach net zero is required in emerging/developing economies, sovereign issuance can help kickstart these large inflows of capital.

Concerns:

• Rate Interest paid on SGB: It is believed an SGB will have a lower yield, in which case, there is no reason for banks holding G-secs in excess of their statutory liquidity ratio (SLR) mandate to opt for a lower-yield bond.
• Ideally, the interest rate should be higher, as green projects tend to be more expensive.
• Tax Concessions: The government may have to offer some tax concessions. In its absence, there is a possibility that the banks may like to skip the auctions.
• Pricing of the bond: The pricing of the bond would be the most vital element of the exercise that must be worked out. As RBI has been trying to get retail investors into the G-sec market by giving tax benefits.
• It may be counterproductive as it will make even lower-yield bonds attractive as compared to SGB.
• Therefore, the pricing of the bond would be the most vital element of the exercise that must be worked out.