What are the advantages and challenges associated with the introduction of Sovereign Green Bonds?

October 23, 2023 February 21, 2024

Recently, the Union Minister for Finance & Corporate Affairs has approved the final Sovereign Green Bonds Framework of India. Sovereign Green Bonds will be issued for mobilizing resources for green projects.

Advantages:

  • The Framework follows in the footsteps of India’s pledges under “Panchamrit,” as articulated by the Prime Minister at COP 26 in Glasgow in November 2021. 
  • India’s dedication to the goals set forth in its Nationally Determined Contributions (NDCs), which were established in accordance with the Paris Agreement, will be further strengthened. 
  • The Green Finance Working Committee (GFWC) was formed to validate critical decisions regarding the issuance of Sovereign Green Bonds.
  • The money raised from the sale of these bonds will be used for public projects that lower the economy’s carbon intensity.
  • The development of a sovereign green benchmark could eventually lead to the establishment of a thriving ecosystem for raising green bonds from international investors.

Challenges:

  • Capital is fleeing emerging bond markets as a result of the present international scenario, which is exacerbated by the US Federal Reserve’s quick hike in interest rates and growing US treasury yields. 
  • Concerns about the stronger dollar have restricted fresh bond issuance in offshore markets. 
  • The SGBs that the Indian government’s plan to issue are anticipated to be issued in the domestic markets and to be denominated in rupees. Therefore, getting a favourable premium is probably going to be challenging.

Way forward:

While this will bring India closer to its goals under the worldwide climate action initiative, economic sustainability will also be a determining element in the exercise’s success.

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