Green Bonds and their green Impact
8th Feb, 2022
Giving a push to the government's borrowing programme in 2022-23, finance minister Nirmala Sitharaman proposed to issue sovereign green bonds to mobilize resources in the Budget.
"Sovereign 'green bonds' will be issued for mobilizing resources for green infrastructure,” said the FM.
What Are Green Bonds?
- Category: Debt Instruments
- Simply put, Green bonds are financial instruments that finance green projects and provide investors with regular or fixed income payments.
- Inception: The first green bondwas issued in 2007 by the European Investment Bank, the EU’s lending arm.
- Issued by: Green bonds are the bonds issued by any sovereign entity, inter-governmental groups or alliances, and corporates.
- Aim: The proceeds of the bonds are utilized for projects classified as environmentally sustainable.
Environmentally Sustainable Projects
- Moreover, projects defined as sustainable under the disclosure requirement for Green Debt Securities include
- climate change adaptation,
- sustainable waste and water management
- sustainable land use including sustainable forestry and agriculture
- biodiversity conservation
How they different from conventional securities?
- Green bonds differ from conventional fixed-income securities in one aspect that the issuer pledges to use the proceeds to finance projects meant for positive environmental or climate effects.
- As a part of the government’s overall market borrowings in 2022-23, Sovereign Green Bondswill be issued for mobilising resources for green infrastructure.
- The proceeds from these bonds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.
- The government has unveiled a record borrowing of Rs 14.95 trillion in FY23.
Benefits of Green Bonds:
- Showcasing commitment towards sustainable development: Green Bonds enhances issuer's reputation and showcases its commitment to sustainable development.
- Lower interest rate: They typically have a lower interest rate than the loans offered by the commercial banks.
- Fulfilling green commitments: Ability to meet commitments, for signatories to climate agreements and other green commitments.
- Attracting investment: Foreign investors are focusing more on green investments which in turn may help in reducing the cost of raising capital.
- Increasing financial flow: They have been crucial in increasing financing to sunrise sectors such as renewable energy, thereby contributing to sustainable growth.
Challenges associated with Green Bonds:
- Misuse of funds: It has been noted that many times that the proceeds of green bonds are being used to fund projects that harm the environment.
- Lack of guidelines: There's a lack of credit ratings or rating guidelines for Green Bonds or Green Projects.
- Time-taking process: Green projects require more time to derive returns.