Sovereign Green Bond

In News

• The Finance Minister in her Budget 2022 speech announced the government will increase capital expenditure to a massive Rs 7.5 trillion in the next fiscal year.
  • The budget announcement that stands out in terms of boosting green investment is the government’s promise to issue a sovereign green bond.

What is Green Bond?

• It is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. 
  • The first green bond was issued in 2007 by the European Investment Bank, the EU’s lending arm. 
  • This was followed a year later by the World Bank. Since then, many governments and corporations have entered the market to finance green projects.
• These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.
• They are designated bonds intended to encourage sustainability and to support climate-related or other types of special environmental projects. 
• Aims and Objectives: 
  • They are aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management.
  •  They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change. 

What is the need of Green Bonds?

• Climate changes affect all of us. But it is expected to hit the developing countries the hardest: Its potential effects on temperatures, precipitation patterns, sea levels and frequency of weather related disasters pose risks for agriculture, food and water supplies. 
• At stake are the recent gains in the fight against poverty, hunger and disease, and the lives and livelihoods of people living in developing countries: Clean water and food security are at risk in the world today and about 1 million of the planet’s 8 million animal and plant species face extinction.
• It’s critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development.

Challenges associated with Green Bonds

• Borrowing programme:
  • The government has a gross borrowing programme of around 14.95-lakh crore.
  • But in this case there will be earmarking of the amount raised to specific targeted projects. Therefore, the crux is that the recipients of such funds should be compliant.
• Monitoring challenge:
  • There would be a challenge with respect to monitoring how this green grading performs.
  • This will be a challenge until such time the system of evaluation is streamlined as deviations from the norm are hard to capture.
• Pricing issue:
  • Should they be lower than the regular bond or higher is the major question here.
  • Ideally, it needs to be higher; this is because investors need to be rewarded for choosing to promote ESG goals.
  • On the other side it can be argued that the rates can be lower than normal because investors like to reward green projects, anyway.
• Overseas launch:
  • The downside is that once the government goes global, then credit rating will matter a lot as all bonds issued globally need to be rated.
  • Once one is rated by them, there is constant scrutiny on domestic policies. Presently, this does not matter because the government of India does not borrow from the overseas market.

Benefits of investing in green bonds

• Environmental causes: 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.
• Exemption from taxes: Green bonds provide you with a way to earn income that is exempt from taxes.
• No Harm: The money that is being invested is being used in a way that is not harmful.
• Fight climate change: 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.
• Some issuers also use the money to help restore water habitats and biomes and to take steps to reduce carbon output: These bonds tend to carry the same credit rating as other debts issued by the same firm.
• Longer maturities can lower the borrowing cost for green projects: Sovereign green bonds have been issued with an average tenor of 14 years the longest being 40 years issued by the Chilean government in 2021 drawing long-term investors like pension funds, insurers and those with a focus on environmental, social and governance (ESG) issues.

Green Bonds and India

• 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 2021. It was the strongest issue since the first issue in 2015.
• The government’s promise to issue a rupee-denominated sovereign green bond is an important step in the right direction.
  • It should also consider issuing the rupee-denominated sovereign bond offshore (rupee-denominated bonds issued outside India are popularly known as masala bonds).
• 75% of Indian districts, where over 638 million Indians reside, are classified as extreme climate event hotspots. The frequency of extreme climate events such as cyclones, droughts, and floods pose a serious risk to India’s infrastructure.
• 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.
• The green bonds initiative by the government should bring in a new set of investors to India’s debt market even as the Budget was silent on India’s inclusion in global bond indices.
• Sovereign green bonds can support the proliferation of electric buses and allied charging infrastructure in India by providing cost-effective financing options.

Way Forward

• To tackle this immense challenge must involve both mitigation to avoid the unmanageable all while maintaining a focus on its social dimensions: To address climate change it requires unprecedented global cooperation across borders. Green bonds are the way to make this connection.
• Investment from a developed economy will be the need of the hour.
• The flows from green bonds could be derailed for some time due to the war between Ukraine and Russia but over the long term we should be moving ahead fast in reshaping the climate debate and ensuring more funding for climate friendly initiatives.
• Developing markets, including Serbia, Nigeria, Egypt, Colombia, Fiji, Indonesia and Benin, have also issued sovereign green bonds.
  • The proceeds were allocated to climate mitigation or adaptation projects.

Source: ET