What Are Sovereign Green Bonds?
Sovereign Green bonds are debt instruments. The money collected by selling these bonds are invested in projects that have positive impact on the environment. Green bonds are a key tool for governments to raise capital to implement infrastructure plans in line with national climate targets. A sovereign green bond can provide a strong signal of the country’s commitment to a low-carbon economy, help bring down the cost of capital for green projects by attracting new investors, and mobilise private capital towards sustainable development.
Union Budget 2022 Visions Net Zero Carbon Emissions through Sovereign Green Bond
Finance Minister Nirmala Sitharaman revealed the Central Government’s intention to issue green bonds while presenting the Union Budget 2022. Green bonds will have a sovereign rating, and the proceeds from their sale will be used to fund a variety of public-sector projects that would help India reduce its carbon emissions.
Budget 2022, however, included no indication of the interest rate at which these green bonds would be issued. Various governments across the world have determined the increasing need for stern measures concerning climate change. Since 2008, G20 summits have seen this topic raised every single time.
India, also a part of G20, under the leadership of Prime Minister Narendra Modi, pledged in the COP26 climate meeting that India would achieve net-zero carbon emissions by 2070. To fuel this ambitious plan, India needs huge, which has resulted in the issue of green bonds since 2015.
Government Plans for Sovereign Green Bond
The government of India is planning to issue at least Rs 24,000 crore or $3.3 billion in Sovereign Green Bonds. The debut sale of green bonds is likely to take place next fiscal year starting on April 1. A decision to whether sell green bonds or not will take place after response to the initial issuance.
The government is expecting to lower green bonds yields. Globally, several countries are executing sustainable investments options. India, which is the third-largest greenhouse gases emitter has planned to four times increase its renewable energy power generation capacity by 2030.
While the sovereign green bond issuance can send a signal on the country’s commitment to low-carbon growth strategies, it can push the financial market towards decarbonisation.
Advantage of Issuing Sovereign Green Bond
- Sovereign Issuers can serve as Role Models for other Type of issuers and contribute to the development of the green finance market.
- These issues catalysed the growth of green issuance in India to nearly $10 billion in 2021. Green Sovereign issuance also will bring in additional collateral benefits. These include enhanced collaboration with different stakeholder groups and providing additional transparency into public spending for investors and citizens.
- Sovereign green issuance sends a powerful signal of intent around climate action and sustainable development to governments and regulators.
- It will catalyse 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.
Challenges for Issuing Sovereign Green Bond
- The primary issue stems from the use of bond proceeds when India does not have a taxonomy on green finance—a classification system that establishes a list of green economic activities. Green Finance Taxonomy is the first step in providing companies, investors, and policymakers with an appropriate definition for what constitutes “green.”
- Another critical issue is a water-tight project selection criterion. There is a risk of projects being selected based on political considerations or their potential to signal to the world community a “genuine concern” for the impending climate crisis.
- As a sovereign institution, the government is likely to consider non-green, for example, social aspects, in project selection rather than projects with the maximum potential to reduce carbon emissions. Global best practices on green bond issuance emphasise transparency, accuracy, and integrity of information on the usage of proceeds.
- As issuers of green bonds, governments must disclose and report on the management of proceeds and the process followed for project evaluation and selection. In the absence of a robust green tagging mechanism, compliance can become a challenge as the proceeds of sovereign bonds are usually fungible.
Sovereign Green Bonds and India
The proceeds will go towards projects in the public sector with an aim to reduce the carbon intensity of the economy. India is the third biggest carbon emitter in the world.
Companies such as Yes Bank and CLP Wind Farms have sold $625 million of green bonds in India. Sovereign green bonds are expected to have lower yields than other sovereign bonds, and have long tenors in order to facilitate capital investments in green energy projects. Issue sizes may swell in the coming years depending on the success of the upcoming issue.
The green bonds issuance in India in 2021 was exceptional and is to set a new record in 2022. India issued $6.11 billion of green bonds in 11 months of 2021. It was the strongest issue since the first issue in 2015. Indian Companies have become increasingly conscious of their carbon footprint. Banks will step up issuance of green debt to fund their growing lending programme to accelerate India’s energy transition.
More Indian issuers will also turn to the offshore bond market to access the wider and deeper capital pool outside their home country. Green bonds issued by emerging markets such as India have a strong appeal to foreign investors due to relatively attractive valuation and decent economic growth prospects.
India will need $10.103 trillion by 2070 to be carbon neutral. The cumulative investments needed for net-zero societies may be bigger than India’s current size of the economy. Investment from a developed economy will be the need of the hour. In addition, more financial incentives from the Indian government will also be crucial to accelerating the growth of the nation’s green bond market. India is surely a late comer on the significant growth of the green bonds.
Thus Sovereign issuers can serve as role models for other types of issuers and contribute to the development of the green finance market through the following ways.
Green bonds provide a way to help environmental causes through investing.
Buying a green bond might be too costly for retail investors. Still there are green bonds that make it easy to invest in baskets of green bonds.
Green bonds provide you with a way to earn income that is exempt from taxes.
The money that is being invested is being used in a way that is not harmful.
The green angle attracts a growing number of people who are more aware of and want to act to help fight climate change.
Higher demand for green bonds equals lower cost of money which means reduced spending for business. These savings are passed on to the investor in the form of a dividend or used to lower the cost of funds thus increasing profitability.