Economy

Know about India’s first Sovereign Green Bonds

Infusing New LiFE into Green Development, India is addressing the issue of climate change with various initiatives to usher in a movement for sustainable living. Alongside the government, individuals, corporations, and organisations too must participate in this action to mitigate the climate hazards today.

The Development Working Group Committee meeting was held in Mumbai from December 13-16, 2022 under India’s G20 Presidency. The Grouping discussed Green Finances for Climate Action, as part of a public policy initiative, taking steps both at national and sub-national levels to balance environmental sustainability.

Earlier on 9 November 2022, the government approved India’s First Sovereign Green Bonds Framework in a bid to strengthen the country’s commitment towards its Nationally Determined Contribution (NDCs) targets and help in attracting global and domestic investments in eligible green projects.

What are Green Bonds?

Green Bonds are basically a financial arrangement that generates proceeds for investment in environmentally sustainable and climate-suitable projects. Environmentally sustainable projects include the production of energy from renewable sources like solar, wind, biogas, green building, recycling, efficient disposal and conversion to energy, etc.

Green Bonds also finance the cultivation of environmentally friendly technologies alongside the mitigation of climate change.

In order to meet the financial needs of these types of projects, new financial instruments such as green bonds; carbon market instruments (e.g. carbon tax); and new financial institutions (e.g. green banks and green funds) are being established – together they constitute green finance.

Due to their environmental sustainability needs, Green bonds command a relatively lower cost of capital vis-à-vis regular bonds and necessitate credibility and commitments associated with the process of raising bonds.

India’s First Sovereign Green Bonds Framework

India’s first-ever green bonds are set to focus on funding solar power projects, followed by wind and small hydro projects in an attempt to tap the domestic debt market to finance clean projects.

The issuance of Sovereign Green Bonds will help the Government of India in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy. This framework sets forth the obligations of the Government of India as a Green Bond issuer.

A ‘green project’ classification is based on the following principles:

Encourages energy efficiency in resource utilization

Reduces carbon emissions and greenhouse gases

Promotes climate resilience and/or adaptation

Values and improves natural ecosystems and biodiversity, especially in accordance with SDG principles

Ministry of Finance has informed that proceeds from green bonds will not be used to fund nuclear projects, hydropower plants larger than 25 MW and any biomass-based power generation with biomass originating from protected areas.

The Ministry has further constituted a “Green Finance Working Committee” (GFWC) with representation from relevant line ministries and chaired by Chief Economic Adviser. GFWC will meet at least twice a year to support the Ministry of Finance with the selection and evaluation of projects and other relevant work related to the Framework. The panel of this committee will further ensure that proceeds from the bonds are allocated within 24 months from the date of issuance.

A governing body is needed to overcome various challenges that could occur while issuing Green Bonds/Finances. The major challenges could be high borrowing costs, false claims of environmental compliance, a plurality of green loan definitions, and maturity mismatches between long-term green investments and relatively short-term interests of investors.

To prevent such discrepancies, the government must ensure the standardisation of green investment terminology for all investors with a good information block to exchange all the guidelines.

Being a populous, tropical developing country, India faces a bigger challenge in coping with the consequences of climate change than most other nations. The country’s policies for green financing have been framed along the lines of five nectar elements (Panchamrit) of India’s climate action, declared by PM Modi at COP26 at Glasgow in November 2021;

Reach 500 GW of Non-fossil energy capacity by 2030.

50 per cent of its energy requirements from renewable energy by 2030.

Reduction of total projected carbon emissions by one billion tonnes from now to 2030.

Reduction of the carbon intensity of the economy by 45 per cent by 2030, over 2005 levels.

Achieving the target of net zero emissions by 2070.

Amidst meticulously overcoming these challenges, India’s upcoming issuance of Green or Climate finance will prove to be a compelling financial tool to align India’s growth with various climate change measures.

 

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