Why in news?

• RBI auctioned maiden Sovereign Green Bonds (SGrBs) worth Rs 8,000 crore on January 25.
• This is part of the Rs 16,000 crore Sovereign Green Bond auction that the RBI will conduct in the current financial year.
  • The second green bond auction will be conducted on February 9.

What’s in today’s article?

• Green Bonds – about, importance, benefits for investors, India’s journey etc.
• News Summary

What are Green Bonds?

• These are bonds issued by any sovereign entity, inter-governmental groups or alliances and corporates.
• These bonds are launched with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable.
  • Sovereign green bonds are issued by governments to raise resources for such projects.
• In India, the framework for the sovereign green bond was issued by the government on November 9, 2022.

Why are these bonds important?

• Over the last few years, Green Bonds have emerged as an important financial instrument to deal with the threats of climate change and related challenges.
• According to the International Finance Corporation (IFC) climate change poses risks for agriculture, food, and water supplies.
• Hence, it is critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development.
• Green Bonds are a way to make that connection.

How beneficial are Green Bonds for investors?

• Green Bonds offer investors a platform to engage in good practices, influencing the business strategy of bond issuers.
• They provide a means to hedge against climate change risks while achieving at least similar, if not better, returns on their investment.
• In this way, the growth in Green Bonds and green finance also indirectly works to disincentivise high carbon-emitting projects.

India’s journey towards issuance of Sovereign Green Bond

• The Union Budget 2022-23 made an announcement to issue Sovereign Green Bonds.
• In November 2022, Finance Ministry approved the final Sovereign Green Bonds framework of India.
  • As per the provisions of the framework, Green Finance Working Committee (GFWC) was constituted to validate key decisions on issuance of Sovereign Green Bonds.

How will be bonds’ proceeds be used?

• The proceeds from the green bonds issuance will be deposited in the Consolidated Fund of India (CFI), and then funds from the CFI will be made available for the eligible green projects.
• The government said the bonds’ proceeds will be used for green projects that:
  • Encourage energy efficiency;
  • Reduce carbon emissions and greenhouse gases;
  • Promote climate resilience and/or adaptation;
  • Improve natural ecosystems and biodiversity, especially in accordance with the principles of SDGs
• The framework listed investments in solar, wind, biomass, hydro energy projects, urban mass transportation projects (e.g. metro rail), green buildings, pollution prevention and control projects.
• The government excluded projects such as fossil fuels, nuclear power generation, and direct waste incineration.

News Summary

• The maiden SGrB auction of Rs 8,000 crore, held on January 25, got oversubscribed owing to robust demand from various market participants, primarily banks.
  • A sovereign bond is a specific debt instrument issued by the government.
  • Just like other bonds, these also promise to pay the buyer a certain amount of interest for a stipulated number of years and repay the face value on maturity.
  • These bonds are a source of government financing alongside tax revenue.
• The 5-year and 10-year green bonds were issued at a premium compared to the similar existing maturity sovereign regular bonds.
• Green premium, or greenium refers to the negative difference in spreads between green and non-green bonds with the same financial characteristics (currency, tenor issued by the same issuer. The green premium suggests that green bonds have a pricing advantage to the issuer over conventional bonds.