SOVEREIGN GREEN BONDS

• Sovereign Green Bonds are a type of government debt instrument issued by a sovereign nation specifically to finance environmentally sustainable projects. These bonds are dedicated to funding initiatives that contribute to the transition to a low-carbon economy, mitigate climate change, and promote environmental sustainability.
• The proceeds from Sovereign Green Bonds are earmarked for projects such as renewable energy infrastructure development, energy efficiency improvements, green transportation initiatives, sustainable agriculture, and other environmentally friendly endeavours.
• The key characteristic of Sovereign Green Bonds is their alignment with internationally recognized green finance principles and standards.
• Issuers typically establish a framework outlining the types of projects eligible for financing through these bonds, ensuring transparency and accountability in the allocation of funds.
• Investors in Sovereign Green Bonds are attracted not only by the financial returns but also by the opportunity to support sustainable development and address pressing environmental challenges.

3. Facilitating the Green Transition

• Enabling Foreign Institutional Investors (FIIs) to invest in India's green projects expands the financial resources available to support the country's ambitious goals for transitioning to a greener economy by 2070. These goals include ensuring that 50% of India's energy is sourced from non-fossil fuel-based sources and reducing the carbon intensity of the nation's economy by 45%, as pledged by Prime Minister Narendra Modi at COP26 in Glasgow in 2021.
• The Reserve Bank of India (RBI) had issued Sovereign Green Bonds (SGrBs) worth ₹16,000 crore in two tranches in January and February of the previous year, with maturities in 2028 and 2033. While these bonds were oversubscribed on both occasions, the primary participants were domestic financial institutions and banks, limiting the avenues for government borrowing. Additionally, these green Government-Securities (G-Secs) were classified under the Statutory Liquidity Ratio (SLR), further constraining the financial institutions' lending capacity.
• SGrBs typically offer lower interest rates compared to conventional G-Secs, leading to what is termed as a "greenium" - the amount foregone by a bank by investing in them. However, central banks and governments worldwide are encouraging financial institutions to embrace green investments to accelerate the transition to a sustainable future.
• Climate finance experts believe that allowing FIIs to invest in green G-Secs would benefit India. They point out that FIIs are seeking to diversify their portfolio of green investments, especially in light of significant regulatory support in developed countries. Investing in India's green G-Secs presents an opportunity for them to do so.
• FIIs may also be motivated to acquire green credentials, particularly when such investment opportunities are limited in their home markets. India's successful implementation of the Sovereign Green Bonds Framework in late 2022 has addressed concerns about greenwashing, further enhancing the attractiveness of these investments.

4. Understanding the Green Taxonomy Gap

• In the 2022-23 Union Budget, Finance Minister Nirmala Sitharaman announced the government's decision to issue Sovereign Green Bonds (SGrBs) to expedite funding for various government projects, including initiatives such as offshore wind harnessing, grid-scale solar power production, and promoting the transition to battery-operated Electric Vehicles (EVs).
• However, a critical gap emerged as the Reserve Bank of India (RBI) had not established a green taxonomy or a standardized method to evaluate the environmental or emissions credentials of investments. This gap raised concerns about potential greenwashing, wherein projects falsely claim environmentally friendly characteristics to secure funding.
• To bridge this gap, the Finance Ministry unveiled India's inaugural SGrB Framework on November 9, 2022, outlining the types of projects eligible for funding through this category of Government-Securities (G-Secs).
• These projects encompassed a range of initiatives, including investments in small-scale solar/wind/biomass/hydropower energy projects with integrated energy generation and storage, upgrades to public lighting systems (e.g., transitioning to LED lights), construction of low-carbon buildings, energy-efficiency retrofits for existing buildings, enhancements to public transportation infrastructure, subsidies to promote EV adoption, and the establishment of EV charging infrastructure.
• Furthermore, the government sought validation from Norway-based validator Cicero to compare India's SGrB Framework with the green principles outlined by the International Capital Market Association (ICMA).
• Cicero rated India's framework as a "green medium," highlighting its good governance practices.
• The importance of identifying new green projects with credible audit trails and significant impact, particularly those areas that have received limited private capital, such as Distributed Renewable Energy and clean energy transition finance for Micro, Small, and Medium Enterprises (MSMEs).
• Addressing this gap is crucial for effectively deploying the proceeds from SGrBs and advancing India's sustainable development goals.