The Buyt Desk
SGrBs (Sovereign Green Bonds) framework was declared on November 9, 2022. It has been put into action when the Central government announced the launch of the bonds in 2 tranches worth Rs 16,000 crores within a month. In this post, you’ll learn what green bonds are, how it works, and how they assist in the financing of clean projects.
What are Green Bonds and their Benefits?
Debt instruments where the capital raised is used to fund new or current green projects are known as green bonds. The green projects may include clean transportation systems, renewable energy ventures, and others. These bonds are structured like other traditional bonds but have some major differences. According to the Climate Bonds Initiative (CBI), eligible projects can be classified under Waste Management, Energy, Land Use, Energy Efficiency, Transport, Water, or Adaptation Infrastructure.
Green bonds help in raising funds for environmental infrastructure expenses that may be inefficient using highly expensive capital. Considering large investments essential for green projects, the current traditional financing sources like domestic bank loans may not prove to be enough.
How Sovereign Green Bonds Work?
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These bonds are allotted for mobilizing resources for green infrastructure, which is mainly related to organizing the mobilized funds in the projects of the public sector to lessen the carbon economy intensity.
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Green bonds will be launched in two auctions. This would provide institutional investors ample opportunity to be a part of the government’s environmentally sustainable initiatives.
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The government gives sops such as allotting them via uniform price auction to make them eligible for Repo as like SLR purposes. It all happens to make them useful for institutional investors.
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The fact Green bonds are different from other ordinary government-issued bonds is that funds raised from investors are just used for supporting initiatives that create a good impact on the environment. For example, renewable energy and green construction.
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Considering the returns on these bonds, Green bonds are issued worldwide at a higher premium which results in lower returns. It is because they are issued with a sovereign guarantee.
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The success would be based on the creation of a conducive ecosystem for those securities. For example, foreign investments, where green investing is a fury. The present currency surroundings may work like a dampener with foreign investors thinking about the risks of the exchange rate.
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According to the framework declared earlier, the risk is reduced in these bonds. Earlier, principal payments and interest on these bonds are not uncertain of the eligible projects’ performance. The investors don’t have any risk related to the project.
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Even though these bonds have tax incentives related to them, no details associated with these bonds have emerged out on these bonds.
Green Bond Scenario in India
In India, the market for green bonds is comparatively small. The CEEW (Council on Energy, Environment and Water) evaluates that about 1.62 billion US dollars of green bonds were issued in the nation in 2016. It is a small fraction of the total issue of USD 81 billion issued worldwide.
India plans to install approximately 175 GW of renewable energy by the end of 2022, which needs about USD 264 billion in investments. Probably, Green bonds may support renewable energy projects deployment by offering huge access to domestic and foreign capital and better financing terms like lower interest rates with higher lending terms.
Support of Policy Action for Green Bonds
Policymakers can support green bond issuance by providing various kinds of tax incentives which could either be provided to the issuer or the investor. Some of them are as follows –
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Direct subsidy bonds: In this bond, issuers get cash rebates from the government to subsidize net interest payments.
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Tax credit bonds: In this bond, investors get tax credits rather than interest payments. Hence, issuers don’t need to pay interest on their bond issuances.
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Tax-exempt bonds: In this bond, investors are relieved from paying income tax on the interest they earn from green bonds.
