In the Union Budget 2022-2023 announcement, Nirmala Sitaraman has mentioned that “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 reduce the economy’s carbon intensity”.
So what are green bonds, and why do we need them? Please read our complete guide on green bonds.
What are Green Bonds in India?
Green bonds are a type of debt instrument to raise funds for climate and environmental projects. Generally, companies, governments, countries and multilateral organisations issue these bonds. Like other bonds, green bonds also offer investors fixed interest payments. Also, they offer tax incentives like tax credits, making them attractive for investors.
These bonds are very similar to other traditional bonds. However, they are different from one aspect, i.e. the issuer earmarks the proceeds from these bonds for green projects. Some green projects include sustainable agriculture, pollution prevention, fishery and forestry, clean water and transportation, environment-friendly water management projects and many more. On the other hand, for regular bonds, the issuer can use the proceeds for various purposes at the discretion of the issuer.
For bonds to qualify as green bonds, ICMA (International Capital Market Association) has come up with four components that help to ensure transparency and disclosure in the development of such bonds.
- The proceeds must be used for green projects.
- The issuer must indicate the process adopted for project evaluation and selection.
- Also, the issuer must maintain transparency in the management of proceeds
- They must also report the progress and impact about the use of proceeds
Thus this information also helps investors with sustainability to their investments. Moreover, helping the issuer to develop a framework.
Who Issues Green Bonds?
The following issues Green bonds in India –
- Multilateral Organisation
It is essential that the issuer labels the bonds as ‘green’ in public documents. Also, the issuer mobilises the revenue from these bonds for climate and environmental projects. If more than 5% of the revenue is used for any other purpose, it is not a green bond.
What are the Features of a Green Bond?
The following are the features of this bond –
- This bond is similar to a regular bond used to raise money for the specific purpose of funding green projects like renewable energy, fishery and forestry, clean environment, etc.
- The issuer uses the proceeds from green bonds fund green projects and not other purposes.
- The bondholders receive fixed coupon payments until maturity.
- Generally, the duration for these is very long, i.e. ten years or more, because the green projects are long term projects.
- Upon maturity, the issuer repays the principal amount to the investor.
- These bonds offer special tax incentives like tax credits or tax exemption to attract investors.
Advantages and Disadvantages of Green Bonds
The following are the advantages of these bonds –
- Green bonds help to create goodwill for the issuer as well as for those investing in them.
- These bonds are suitable for investors particularly looking to invest in environmental projects.
- The interest of these bonds is lower than the loans offered by commercial banks.
- Foreign investors are aiming for more green investments. As a result, the cost of raising capital can be minimised.
- Such bonds are helpful in the development of local financial markets, even for non-environmental projects.
- Because these bonds help fund the green projects, it eventually leads to a better environment in the future.
- RBI has included the renewable energy sector as part of its priority sector. As a result, banks have to dedicate a specific portion of their lending book towards the priority sector. This will help the credit flow in this sector.
The following are the disadvantages of these bonds –
- At times, the green projects focused on by issuers are questionable. This is because the issuer uses the proceeds from these bonds to finance projects that harm the environment.
- There is a lack of credit rating and rating guidelines for these bonds.
- Issuers issue these bonds for a longer period say ten years which may fail to offer liquidity to some investors. Also, green projects require a more extended period to deliver returns.
- Investors are reluctant to invest in these bonds because their credit rating is below AAA or AA.