The Union Minister for Finance & Corporate Affairs of the Indian Government has recently approved the Sovereign Green Bonds Framework. This framework aims to mobilise resources for green projects and takes a significant stride in fulfilling India’s commitments regarding climate change under “Panchamrit”, as stated by the Prime Minister at the Conference of Parties (COP) 26 in Glasgow in November 2021.
This approval supports India’s commitment towards its Nationally Determined Contribution (NDCs) targets adopted under the Paris Agreement. In order to validate the critical decisions surrounding the issuance of Sovereign Green Bonds, the Green Finance Working Committee (GFWC) was formed. It’s noteworthy that the Norway-based independent second opinion provider CICERO has rated this framework as ‘Medium Green’ with a ‘Good’ governance score.
Understanding Sovereign Green Bonds
Green bonds are issued by organizations or countries with the objective to fund projects that have positive environmental or climate benefits. These bonds also offer fixed income payments to investors. The money raised from green bonds is specifically allocated for green projects differing from standard bonds where the proceeds can be utilized for various purposes by the issuer.
By the end of 2020, as per the Climate Bonds Initiative based in London, 24 national governments had issued Sovereign Green, Social and Sustainability bonds, accumulating to a total of USD 111 billion.
Advantages of Sovereign Green Bonds
Sovereign green bonds communicate a robust signal encompassing climate action and sustainable development to governments and regulators. With the estimates from the International Energy Agency’s (IEA) World Energy Outlook 2021 suggesting that approximately 70% of the additional USD 4 trillion required to reach net-zero is needed in emerging or developing economies, these bonds could stimulate sizeable capital inflows.
The Current Status of Green Bonds
Globally, funds related to Environmental, Social and Governance (ESG) are estimated at USD 40 trillion, with Europe accounting for about half of this amount. The prediction is that by 2025, ESG assets will make up about one-third of the total global assets under management. The ESG debt funds approximately account for USD 2 trillion, and 80% of these are green bonds.
In India, entities have released green bonds exceeding USD 18 billion as stated by the Climate Bonds Initiative, an international organization striving to mobilize worldwide capital for climate action.
Recent Climate Action Measures Announced in the Budget
The budget includes several measures on climate action such as the Battery swapping policy and the Performance Linked Incentive (PLI) scheme for manufacturing high-efficiency solar modules. Plus, a new bill that aims to establish a regulatory framework for Carbon Trading in India has been proposed to encourage renewable energy integration into the energy mix.
Understanding Bond Yields
A bond is a tool used to borrow money and could be issued by a country’s government or a company to raise funds. Bond yield is essentially the return realized by an investor on a bond, and these yields depend on trends in interest rates. The United States Federal Reserve’s actions, the Reserve Bank of India’s policies, inflation, and short-term interest rates can impact bond yields.
‘IFC Masala Bonds’ Explained
The International Finance Corporation (IFC), which offers ‘IFC Masala Bonds’, is an arm of the World Bank. These are rupee-denominated bonds that serve as a source of debt financing for the public and private sector. The objective of ‘IFC Masala Bonds’ is to fund infrastructure projects in India, stimulate internal growth through borrowings, and internationalize the Indian currency.
