Green bonds: Finance Ministry clears framework
11th Nov, 2022
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 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 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).
Sovereign green bond
Benefits of Green Bonds
- 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
- 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:
- Use of proceeds
- Project evaluation and selection
- Management of proceeds
- 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.