Explained: What Sovereign Green Bonds are and How They Work
In Budget 2022, Centre proposes to issue sovereign green bonds to raise money for climate solutions
Union Finance Minister Nirmala Sitharaman, during her Budget speech, announced that sovereign green bonds would be issued in 2022-23 "for mobilising resources for green infrastructure".
These bonds will be a part of the government's overall market borrowings in 2022-23 and the proceeds will be deployed in public sector projects to help reduce the economy's carbon intensity.
The green bonds market is valued at USD 517 billion, according to Climate Bonds Market Intelligence (CBMI), an international not-for-profit mobilising the bond market for climate change solutions. India stood 17th among green bond issuing nations in 2021 with USA, Germany, China, France and UK bagging the top five spots, showed CBMI's analysis.
To better understand what are sovereign green bonds, let's first look into what Green Bonds are.
A green bond, like other bonds, involves an entity issuing a debt instrument to raise funds from investors. However, the difference is that proceeds of a green bond offering are earmarked for use towards financing green projects, according to the Securities and Exchange Board of India (SEBI).
"If an entity raises money for a renewable energy plant in a belt or a zone, on the promise that it'd be completed by a certain period, the investors have the right to ask whether it has been completed or been useful," Suranjali Tandon, Assistant Professor at the National Institute of Public Finance and Policy, told FactChecker.
In 2017, SEBI released the 'Disclosure Requirements for Issuance and Listing of Green Debt Securities' disclosing that the money raised through green bonds can be invested in any one or more of the following eight categories:
- Renewable and sustainable energy (wind, solar etc.)
- Clean transportation (mass transportation)
- Sustainable water management (clean and/or drinking water, water recycling etc)
- Climate change adaptation
- Energy efficiency (efficient and green buildings)
- Sustainable waste management (recycling, waste to energy etc.)
- Sustainable land use (including sustainable forestry and agriculture, afforestation etc.)
- Biodiversity conservation
Green bonds are not new in India. In February 2015, Yes Bank, a private-sector bank, became the first to issue a green bond in India, according to SEBI, which was a 10-year issue amounting to Rs 1,000 crore. The proceeds raised through this green bond were to be used for renewable energy projects such as solar, wind, and biomass projects.
Sovereign Green Bonds
Sovereign green bonds are also debt instruments like green bonds, and issued either by the central or state government, "but typically, a sovereign bond would be issued by the central government," said Saon Ray, a visiting professor at the Indian Centre for Research on International Economic Relations.
This means sovereign green bonds are an extension of green bonds, but here the government gets to borrow money. There are many countries who have issued and experimented with sovereign green bonds, Tandon told FactChecker.
"These have the backing of the Indian government, so they become a more secure instrument. This is the first time a sovereign green bond is instituted by India," said Ray.
Although Sitharaman did say that the proceedings will be issued for "green infrastructure", she didn't specify which projects. "In COP26, India had announced that it will transition to a net zero carbon emission country by 2070. So, this will need a lot of financing, and we will see a lot of action in the world of climate finance going forward," Ray added.
India is still 70.96 gigawatts (GW) shy of reaching its target of the installed capacity of 175GW of renewable energy by 2022.