RBI held the maiden auction of sovereign green bonds (SGrB) to the tune of Rs 8000 crore, as a part of the Rs 16,000 crore sovereign bond auction to be held in the current fiscal. The issue got oversubscribed owing to robust demand. The 5 and 10 year green bonds were issued at a premium compared to the similar, existing ones.
Green bonds are fixed income instruments to finance environment friendly projects which are sustainable and provide solutions to climate change. Sovereign green bonds are the same but they are issued by the government to fund various infrastructure projects which have a positive impact on the environment. The first green bonds were issued by the European Investment Bank in 2007 and after a period of slow growth, it has picked up traction owing to several global green initiatives. These bonds are generally issued at greenium– the premium over their peers, with same financial characteristics.
India and Green Bonds
Various corporates and finance companies have mostly issued 5 and 10 years green bonds over the past, majorly dollar denominated. However, this is the first issue for by the Central Bank. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy. The proceeds raised can be invested in form of investment, subsidies, grant-in-aids, tax foregone (or a combination of all or some of these) or select operational expenditures, R&D expenditures in public sector green projects. Equity is allowed only in the sole case of metro projects under clean transportation category.
Greenwashing
A major concern with green bonds is green washing i.e., misleading about the usage of the funds. To maintain transparency, a comprehensive framework has been established. The proceeds from SGrBs shall be deposited in a separate account in the Consolidated Fund of India. Public Debt Management Cell will keep track of proceeds within the existing guidelines. Projects will be decided and monitored by the Green Finance Working committee (GFCW) under the chairmanship of the Chief Economic Advisor. Ministry of Finance will set up a dedicated information system with a view to maintaining a complete Green Register including the details of the green bond issuance, proceeds generated, allocations made to eligible projects including information about the eligible project. However, it is important to monitor that the projects actually use the investments judiciously.
What is in it for investors?
Green bonds are a great investment option for long term investors and those looking to invest in sustainable projects. The maiden auction was subscribed mainly by insurers and banks. The bonds are treated as part of the insurer’s infra-investments and banks can use it towards government holdings. These bonds can be traded in secondary market and how they fare, will pave the way for future demand. The demand from FPIs is also poised to improve, since there is a robust demand for investing in the ESG (Economic, social and Governance) space globally.
Climate change affects us all and India is amongst the top five countries in terms of carbon emissions. With the targets set by Panchamrit, India needs to increase its efforts and build a strong infrastructure to move towards. This will need massive investment and it is heartening to see that we are in the right direction.
