RBI to issue green bonds in two tranches

As announced in the Union Budget 2022-23, the GOI as part of its overall market borrowings will be issuing Sovereign Green Bonds (SGrBs) the RBI has mentioned that it would be issued in two tranches of Rs 8,000 crore each on January 25 and February 9.

What are Sovereign 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 bond was 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.

Significance:

• The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy, the Reserve Bank of India (RBI) said in a statement.
• It will help for mobilising resources for green infrastructure.

How are they different from conventional securities?

• Green bonds differ from conventional fixed-income securities in one aspect the issuer pledges to use the proceeds to finance projects meant for positive environmental or climate effects.

Benefits of Green Bonds:

• Showcasing commitment towards sustainable development: Green Bonds enhance the 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 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 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.