BL Explainer . What’s different about sovereign green bonds?

A bond is an instrument to raise debt. OECD (Organisation for Economic Co-operation and Development) says using bonds to finance large-scale LCR (Low-Carbon and Climate-Resilient) infrastructure projects directly or to fund lending is not new. However, since 2007, a market for bonds specifically self-labelled or designated as ‘green’ has emerged. This label differentiates a green bond from a regular bond, which signifies a commitment to exclusively use funds raised to finance or re-finance “green” projects, assets, or business activities. When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB). 

How are the projects for green bonds selected?

A project is classified “green” on the basis of four key principles. These include encouraging energy efficiency in resource utilisation, reducing carbon emissions and greenhouse gases, promoting climate resilience and/or improving natural ecosystems and biodiversity, especially in accordance with SDG (Sustainable Development Goals). 

When is the first sovereign green bond likely to be issued? 

In her Budget speech early this year, Finance Minister Nirmala Sitharaman announced, “As a part of the Government’s overall market borrowings in 2022-23, sovereign green bonds will be issued for mobilising resources for green infrastructure. The proceeds will be deployed in public sector projects that help in reducing the carbon intensity of the economy.” Accordingly, the government and the RBI have decided to issue SGrB during the October-March period of FY23, though the date is yet to be announced. In all likelihood, these bonds are to be issued in the January-March quarter. 

How are they different from conventional government bonds? Will they add to the overall government debt? 

Government bonds or government securities (G-Secs) are normally categorised into two — Treasury Bills and dated or long-term securities. Treasury Bills have a maturity of less than one year and they do not carry coupon rates. These are issued at a discount, while redeemed at face value. At the same time, dated or long-term securities are issued for a period above 1 year and up to 40 years. These bonds carry coupon rates and are tradable in the securities market. SGrB is one form of dated security. It will have a tenor and interest rate. Money raised through SGrB is part of overall government borrowing.  

What is the amount that is being targeted to be raised from these issuances? 

The government and the RBI decided to borrow ₹5.92 lakh crore in H2 FY23 through dated securities, including ₹16,000 crore through issuance of SGrBs. 

Who are likely to be the buyers of these bonds? 

Both domestic and international investors are expected to be interested in SGrB. However, one thinking is foreign investors may be slightly hesitant due to currency risk. 

Will the interest on these bonds be lower than similar government bond yields? 

Likely. SRgB may carry lower interest rate  than that for regular government borrowings. 

Have other countries issued such bonds too? How have they been received in other countries? 

According to Bank for International Settlements (BIS) database, SGrB is part of Green, Social and Sustainability (GSS) bonds. In 2007, the European Investment Bank issued a Climate Awareness Bond, the world’s first green bond. The World Bank’s first green bond, in November 2008, was the first to define project eligibility and provide assurance, through a second-party opinion provider, that eligible projects would address climate change.

The first sovereign green bonds were issued by Poland and France as recently as early 2017. At end-2019, the share of sovereign issuers in total outstanding GSS bonds was only 4.2 per cent, but it increased to 7.5 per cent by end-June 2022. By then, 38 sovereigns from five continents had brought out debut GSS issues, with the US being noticeably absent. BIS database reveals the amount of GSS bonds outstanding rose more than fourfold from January 2019, to $2.9 trillion at the end of June 2022.  Data show that these bonds have been successful everywhere.