20-April-2024-Special-Article

INDIA’S SOVEREIGN GREEN BONDS 

The Reserve Bank of India (RBI) has recently permitted Foreign Institutional Investors (FIIs) operating within the International Financial Services Centre (IFSC) to invest in India’s Sovereign Green Bonds (SGrBs).  

This decision aims to accelerate India’s transition to a low-carbon economy by expanding the capital pool for green projects. 

What are Sovereign Green Bonds (SGrBs)? 

• Definition: SGrBs are government debt instruments designed to fund projects promoting India’s shift to a sustainable, low-carbon economy. 
• Purpose: Funds raised through SGrBs are exclusively allocated to green projects, ensuring transparency and accountability in their utilization. 
• Interest Rates: Typically offer lower interest rates compared to Government-Securities (G-Secs), reflecting alignment with sustainable development goals. 
• Certification: Issuance requires adherence to internationally recognized green standards and certification processes to ensure project credibility. 

Classification and Greenium: 

• SLR Classification: SGrBs fall under the Statutory Liquidity Ratio (SLR), influencing liquidity rates set by the RBI for financial institutions. 
• Greenium Concept: The difference in interest rates between SGrBs and conventional G-Secs is termed as greenium, promoting the transition to a greener future. 

Sovereign Green Bonds Framework: 

• Release: India’s first SGrB Framework was released in 2022, outlining eligible green project categories. 
• Funding Allocation: Funds are directed towards nine green project categories, excluding fossil fuel extraction, nuclear power, and certain industries like alcohol and tobacco. 
• Validation: India’s framework received a “green medium” rating from Norway-based validator Cicero, indicating good governance and alignment with global standards. 

Features of SGrBs: 

• Issuance: Through Uniform Price Auction, where a fixed number of bonds are sold at the same price. 
• Transactions: Eligible for Repurchase Transactions (Repo) and considered eligible investments for SLR purposes. 
• Trading: Tradable in the secondary market, enhancing liquidity and market participation. 

Management and Oversight: 

• Fund Management: Bond proceeds are deposited into the Consolidated Fund of India and managed by the Ministry of Finance’s Public Debt Management Cell. 
• Audit: Allocation and utilization of Green Bonds are audited by the Comptroller and Auditor General (CAG) of India. 

Advantages of SGrBs: 

• Sustainability Support: SGrBs bolster sustainability goals while attracting investors, strengthening the Indian currency, and increasing central bank reserves. 
• Demand and Price: Growing demand for socially responsible investments coupled with limited green bond supply can raise prices and yields. 

Role of FIIs in Boosting India’s Green Transition: 

• Capital Expansion: FIIs’ investment in SGrBs expands the capital pool for India’s 2070 net zero goals, aiming for 50% energy from non-fossil fuel sources and a 45% carbon intensity reduction. 
• Pressure Relief: FIIs provide an alternative funding source, reducing pressure on domestic lenders and freeing up capital for other purposes. 
• Investment Goals: The inclusion of foreign investors broadens the investor base for SGrBs, potentially attracting more funds for green projects aligned with India’s Sustainable Development Goals. 
• Foreign Expertise: Foreign investors bring valuable knowledge in green technologies and project management, benefiting Indian green infrastructure projects. 

Challenges: 

Lack of Green Taxonomy: 

• The absence of standardized criteria for assessing environmental credentials poses a risk of greenwashing, where projects falsely claim to be environmentally friendly. 
• Clear green taxonomy is essential to accurately identify and classify eligible green projects. 

Framework Implementation: 

• Despite the release of India’s SGrB Framework, effective implementation and enforcement are crucial. 
• Robust monitoring mechanisms are necessary to ensure that funded projects adhere to defined criteria and contribute to environmental sustainability. 

Project Selection and Impact: 

• Identifying impactful green projects with credible audit trails is essential for optimal deployment of SGrB proceeds. 
• Sectors with limited private capital, like Distributed Renewable Energy and clean energy transition finance for MSMEs, may face challenges in attracting funding. 

Availability of Suitable Projects: 

• Securing a pipeline of eligible green projects, particularly in sectors like offshore wind and Electric Vehicles (EVs), is challenging. 
• Active encouragement and incentivization of project development are needed to ensure a steady flow of investment opportunities. 

Way Forward: 

• Enhance transparency in green bond issuance and viability. 
• Conduct specialized awareness programs to promote green project investments. 
• Establish a favorable environment for private investors by mitigating legal, default, and liquidity risks. 
• Implement robust legal frameworks to address defaulters and instill investor confidence. 
• Focus on creating a green investment pool to boost domestic interest and demand. 
• Integrate green projects into institutional investors’ portfolios, involving entities like the Insurance Regulatory and Development Authority of India (IRDAI). 

Mains Question: 

1. “Discuss the significance of India’s Sovereign Green Bonds (SGrBs) in promoting sustainable development and the challenges faced in their implementation.” (150 words)