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Sovereign Green Bonds

In News: The Reserve Bank of India is conducting the first-ever Sovereign Green Bond (SGrBs) auction, worth Rs 8,000 crore as part of the Rs 16,000 crore auction that the RBI will be conducting in the current financial year.

Sovereign Green Bonds Background

  • India stands committed to reducingthe emissions intensity of GDP by 45% from the 2005 level by 2030 and achieving about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.
  • In line with the above commitments, the Union Budget 2022-23 made an announcement to issue Sovereign Green Bonds to significantly reduce the carbon intensity of the economy.
  • The government will use the proceeds raised from SGrBs to finance or refinance expenditure (in parts or whole) for various green projects, including renewable energy, clean transportation, energy efficiency, climate change adaptation, sustainable water and waste management, pollution and prevention control and green buildings.

About Sovereign Green Bonds

  • Green bonds are bonds issued by a sovereign entity, inter-governmental groups or alliances and corporations with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable.
  • These Green Bonds have emerged as an important financial instrument to deal with the threats of climate change, as they connect environmental projects with capital markets and investors and channel capital towardssustainable development.
  • Framework for issuance of SGrBs in India:
    • The framework draws from the International Capital Market Association’s (ICMA) Green Bond Principles, which provide principles of voluntary best practice guidance on the use of proceeds, the process for project evaluation and selection, management of proceeds and reporting.
    • The Ministry of Finance has constituted a Green Finance Working Committee (GFWC) to facilitate the process of project evaluation and selection.
    • The funds raised through the issuance of green bonds will be deposited in the Consolidated Fund of India (CFI).
    • Further, the Public Debt Management Cell (PDMC) will keep a track of proceeds and monitor the allocation of funds towards eligible green expenditures.
  • Benefits of SGrBs issuance:
    • Achieve NDC targets: Foster India’s commitment towards its Nationally Determined Contributions (NDC) targets
    • Green finance ecosystem: Build credibility in the global green finance ecosystem.
    • Investor interest: Transparent disclosure norms, reporting frameworks and specific screening criteria of green projects will attract sustained investor interest in India.
    • Attract new investors: Attract new socially responsible investors and asset managers with green investment mandates.
  • Challenges Associated with SGrBs:
    • Greenwashing: The concerns about greenwashing, i.e. the tendency for issuers or brokers to misrepresent the environmental benefits of various types of security, demand credibility of external reviews and reporting on both allocation and impact of SGrBs.
    • Low yield: High investor demand for green bonds could create a so-called ‘greenium’ (green premium), which results in securities frequently offering a lower yield compared to similar bonds without the green label.
Sovereign Green Bonds
Sovereign Green Bonds

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