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Green bonds: Finance Ministry clears framework

  • Category
    Economy
  • Published
    11th 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:

  • Use of proceeds
  • Project evaluation and selection
  • Management of proceeds
  • Reporting
  • 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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