Green bonds: Finance Ministry clears framework

Published: 10th Nov, 2022

Context

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

Background

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 utilised?

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 announcement is in sync with India’s commitment to achieving net-zero carbon emissions by 2070, made in COP26.

Knowing the Terms

Green Bonds

Green bonds are issued by companies, countries, and multilateral organizations to exclusively fund projects that have positive environmental or climate benefits and provide investors with fixed-income payments.
A green bond, like other bonds, involves an entity issuing a debt instrument to raise funds from investors.
However, the difference is that proceeds of a green bond offering are earmarked for use towards financing green projects, according to the Securities and Exchange Board of India (SEBI).

Benefits of Green Bonds	Challenges associated
Showcasing commitment towards sustainable development Lower interest rate Fulfilling green commitments Attracting Foreign investment Crucial in increasing financing to sunrise sectors	Misuse of funds Lack of guidelines Time-taking process

Sovereign green bond

A sovereign green bond is a fixed-income instrument, issued by the government, to raise capital for the environment- or climate-related projects.
Sovereign green bonds are an extension of green bonds, but here the government gets to borrow money.
Unlike in the case of green bonds, regular papers raise funds that have no strings attached i.e., can be used for any kind of project.

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.

Four core components as outlined by ICMA green bond principles are:

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.

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