Green Bonds
What are green bonds?
Green bonds are debt instruments issued by organizations to raise capital, proceeds of which shall be utilized for investments in environmentally sustainable and climate-suitable projects. It can be issued by governments, financial institutions and corporates.
Climate change Commitments:- Background behind Green bonds
In the context of climate change, earlier in 2015, India under ‘Paris agreement’ announced its Nationally Determined Contribution targets to be pursued on 'best effort' basis. PM Further enhanced those targets commitments in Glasgow summit held in London in 2021 calling the targets as 'Panchamrit' of India’s climate action.
One of the 5 targets wrt climate change includes achieving a 45% reduction of emission/carbon intensity of GDP by 2030, over the year 2005 levels.
What is carbon intensity of GDP?
Carbon intensity or emission intensity of GDP is a measure that evaluates the amount of carbon dioxide (CO2) emissions produced per unit of GDP.
Introduction of Green Bonds:
In line with the commitments india expressed as its objectives for climate action, India announced the issue of Sovereign Green bonds in Union Budget 2022-23. The budget text mentioned that these Sovereign Green bonds shall be deployed in public sector projects which help in reducing the carbon intensity of the economy.
Later in November 2022, Finance Minister Nirmala Sitharaman finalized India’s Sovereign Green Bonds framework, in line with key recommendations of International Capital Market Association issued Green Bond Principles (2021).
GOI identified, 9 eligible categories of projects that could be financed using the green bonds. They are:
Renewable energy
Energy efficiency
Clean transportation
Climate change adaptation
Sustainable water and waste management
Pollution prevention and control
Sustainable management of living natural resources and land use
Green buildings and
Terrestrial and aquatic biodiversity conservation
India’s Green Bonds Framework was reviewed and rated as ‘Medium Green’ with a “Good” governance score by CICERO, a globally renowed independent second party opinion provider.
Features of the Sovereign Green Bond (SGrBs)
Features of SGrB bonds are listed below:
- SGrBs are issued through Uniform Price Auction.
- Non-competitive bidding facility: Five per cent of the notified amount of sale are reserved for retail investors as per scheme regulations.
- These bonds are eligible for Repurchase subject to Repurchase Transactions regulations of RBI
- SGrBs are reckoned as eligible investment by banks for SLR purposes.
- Also, SGrBs are eligible for trading in the secondary market, making them accessible to wide range of investors.
- SGrBs are designated as specified securities under the ‘Fully Accessible Route’ for the purpose of investment by non-residents (Foreign Institutional investors
- Sovereign Green bonds are issued at what is called greenium. Greenium refers to the premium that investors are willing to pay for green bonds, considering their sustainability impactand noble cause.
- Like other G-Secs, Green bond investor receives regular interest payments every 6 months and bondholder receives principal back on the maturity date
- To provide transparent information on projects funded from green bonds, Allocation and utilization of Green Bonds will be audited by CAG which shall provide an annual assessment on utilization and management of SGrBs proceeds in accordance with the framework’s criteria.
Cons of investing in Green bonds are:
(a) Lack of liquidity since green bonds like other G-Sec are also issued with larger maturity periods. India’s SGrB issue in 2023 was of 5 year and 10 year maturity.
(b) SGrBs are generally issued at higher premiums (referred to as greenium* ), leading to lower yield.
(c) There is no special taxation benefits specially applicable for these green bonds.