Sovereign Green Bonds: India's step towards Sustainable Investment Options
On 9 November 2022 Wednesday, Nirmala Sitharaman, the Finance Minister of India, approved the Sovereign Green Bonds (SGB) framework to facilitate India's commitment towards Nationally Determined Contribution (NDC) targets, adopted under the Paris Agreement. The step, as taken, is integral in funding projects that are actively contributing to reducing the carbon emission of the economy Also, green bonds command a relatively lower cost of capital compared to regular bonds.
Going forward, let's understand what Sovereign Green Bonds are and how they are essential for India to attract global and domestic investments in future, through this blog.
<h3>What are Sovereign Green Bonds?</h3>
In recent years, countries around the world are stepping up to address climatic concerns proactively, which has contributed to establishing a wide market for environment-conscious products. Hence, global efforts are being made to actively use Green Bonds as a financial instrument and promote eligible projects in the category to flourish.
Green Bonds are just like your regular bonds but with one key difference. These securities specifically cater to projects that support green infrastructure and lead investors' choices in contributing to more sustainable and environmentally positive schemes.
In India, the Sovereign Green Bonds Framework issued by the Government of India (GoI) is an initiative to facilitate investment from potential investors for the deployment of funding in public sector projects aimed at reducing the carbon intensity of the economy.
"As a part of the government’s overall market borrowings in 2022-23, sovereign Green Bonds will be issued for mobilising resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy"
- Union Budget 2022-23 announces the issue of Sovereign Green Bonds
The Sovereign Green Bond Framework states the obligations of the Government of India as a Green Bond Issuer, wherein the Department of Economic Affairs reserves the right to make modifications. It also addresses the vital concerns as stated by the International Capital Market Association (ICMA) Green Bond Principles (2021).
The framework follows closely in the footsteps of PM Narendra Modi's commitments under "Panchamrit" at COP26 in Glasgow in November 2021 and the approval further fulfils the announcement in the Union Budget FY 2022-23 by the Union Finance Minister.
Following this, Finance Minister's SGB approval also promises to strengthen India's investments in eligible green projects, including initiatives related to renewable energy, clean transportation, green infrastructure, and so on. By including various categories and not relying on the overall performance of eligible projects, the framework is designed to minimize project-related risk on investors and ensure long-term cash flow funded by proceeds.
To examine India's green bond framework and certify alignment with the ICMA's Green Bond Principles and international best practices, an independent and globally renowned organisation - CICERO Shades of Green has been appointed. The framework received a 'Medium Green' and a 'Good' governance score from CICERO, which will increase its credibility among investors.
Why Sovereign Green Bond (SGB) is a good investment option?
● The issuer of the bond can decide where the proceeds from funds will be used and ensure fixed-income payments to all investors within 24 months of issuance.
● The market for green bonds has increased by 50 % from last year wherein India stands at 17th position globally.
● This will increase the responsibility and openness about the usage and administration of revenues, resulting in a new risk management tool and direct investment in projects for social improvement
● The investment in green bonds will also help in achieving the target to achieve 175 gigawatts of renewable energy capacity by the end of the year 2022 and net-zero carbon emissions by 2070.
● In addition to comparable fiscal profits, secure investments and added tax incentives such as tax credits and tax exemption, this will directly benefit society by indulging in climate action.
To scale up India's efforts in modifications across many sectors, such as water, agriculture, forest, energy, enterprise, sustainable mobility and housing, waste management, circular economy, resource efficiency, etc., the government continues to launch numerous schemes and programs. Allowance of Sovereign Green Bonds (SGB) will create more sustainable investment options for investors and enable India to progress in coupling economic growth with climate action.