The Union government took an important step recently and issued a robust framework for sovereign green bonds. This will allow it to issue green bonds as announced in the Union Budget.
What is the plan?
The government intends to issue bonds worth Rs 16,000 crore in this category in the current fiscal year, which would help improve investment in renewable energy among a host of other areas as defined in the detailed framework.
What are ‘green bonds’?
- Green bonds are structured similarly to traditional bonds with a commitment to use the proceeds for green investment.
- A number of financial institutions globally invest in such instruments to support the cause of environment protection and are willing to settle for lower yields.
- Since the government intends to invest in containing carbon intensity and will need a substantial amount of resources, green bonds could potentially lower the cost of funding to an extent.
How is it significant?
- India is making significant progress in terms of its climate commitments. A report submitted to the United Nations Framework Convention on Climate Change last year, for instance, showed that India’s emission intensity declined by 24 per cent between 2005 and 2016.
- It has committed itself to reducing the emission intensity of gross domestic product by 45 per cent by 2030 compared to the level of 2005. This would obviously need resources and investment in a variety of areas, and green bonds could become one of the enabling factors in this context.
- Since these are still early days for sovereign green bonds, experience is fairly limited.
- According to a recent note by the International Monetary Fund, the average issuance has been about 2 per cent of the total between 2016 and 2022, though the amount has increased since 2018.
- Emerging markets account for a higher share than the developed world. “Greenium”, defined as the yield difference between similar conventional bonds and green bonds, is also higher in developing economies.
- According to estimates, greenium in emerging markets is about 49 basis points for dollar-denominated bonds. The same is 5-6 basis points in advanced economies. The difference can partly be explained by the usual yield difference between advanced and emerging economies.
What should be kept in mind?
- In the given circumstances, the benefit of green bonds for India would also depend on how well the economy in general is managed. A sustained higher fiscal deficit and inflation could undermine the potential.
- Another critical factor would be how transparently the proceeds of green bonds are managed. History shows that the government often doesn’t spend on the stated purpose for which the funds are raised as is the case in various kinds of cess and surcharge levied. However, the framework for green bonds has laid down conditions that should help avoid such problems.
- The funds raised by green bonds will be deposited as usual in the Consolidated Fund of India. However, a separate account will be maintained by the finance ministry to make funds available for green projects.
- The ministry will also set up an information system to maintain a “Green Register” with details such as the bond issuances, funds raised, and allocations made.
- The government further intends to involve an external third-party reviewer to provide an annual assessment of allocation.
The overall conditions in the framework should be able to boost transparency. Bond issuance in the current year would be critical as it will give a clear idea of actual demand and cost advantage.
Source – Business Standard
QUESTION – What are ‘green bonds’? What is the new framework outlined by the Finance Ministry regarding the sovereign green bonds? Will they be helpful in raising climate finance? Discuss in brief.