What are Sovereign Green Bonds?

February 2, 2022

During the Union Budget presentation, the Finance Minister Nirmala Sitaraman announced the issuance of “Green bonds”. These bonds are to be issued to mobilise green infrastructure resources.

What are green bonds?

Green bonds are debt instruments. The money collected by selling these bonds are invested in projects that have positive impact on the environment. The bonds will help India achieve its target of 175 GW of electric power from renewable sources by 2022.

Capital Expenditure and Green bonds

The minister announced that the government has increased the capital expenditure by 35.4%. That is, in financial year 2022-23, GoI will implement projects worth Rs 7.5 lakh crores. Capital expenditure is the money spent by the government. Most of the money is to go into the green projects.

Green Bonds in India

The bonds are to be introduced in the public sector projects. According to RBI, the cost of green bonds has been higher. This is mainly due to asymmetric information. RBI also says that green bonds contribute only 0.7% of all bonds issued.

Challenges

The green bonds in India have shorter tenor period. In reality, the green projects consume more time in bringing returns. They lack credit rating. Also, there are no rating guidelines for the green projects.

Significance

  • The green bond market is growing at rapid pace. The bonds will help India to access long term funds. This will also improve ESG climate in India.
  • The bonds will help India achieve its goal of achieving net zero emissions by 2070.
  • The issue of green bods says that GoI has put energy transition at the heart of economic growth of the country.
  • The bonds will help to mobilize financial resources of distribution companies.

Way Forward

The domestic and international standards and guidelines for green bonds should be harmonised. The capacity of emerging green markets should be increased. The knowledge related to green bond markets, benefits and other procedures related to green bonds should be increased. The investor confidence should be increased. The green bonds should also be extended to private sector.

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