Context:
Recently, the Reserve Bank of India (RBI) green lighted investments in the country’s Sovereign Green Bonds (SGrBs) by Foreign Institutional Investors (FIIS).
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- What are Green Bonds?
- How beneficial is it for investors?
- What Difference Between SGB and Other Bonds?
- Risks and Challenges
What are Green Bonds?
- Green bonds are bonds issued by any sovereign entity, inter-governmental groups or alliances and corporates with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable.
- The framework for the sovereign green bond was issued by the government on November 9, 2022.
Why are these bonds important?
- Green Bonds have emerged as an important financial instrument to deal with the threats of climate change and related challenges.
- According to the International Finance Corporation (IFC), a World Bank Group’s institution, climate change threatens communities and economies, and it poses risks for agriculture, food, and water supplies.
- A lot of financing is needed to address these challenges. It’s critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development – and Green Bonds are a way to make that connection.
How beneficial is it for investors?
- Green Bonds offer investors a platform to engage in good practices, influencing the business strategy of bond issuers.
- They provide a means to hedge against climate change risks while achieving at least similar, if not better, returns on their investment.
- In this way, the growth in Green Bonds and green finance also indirectly works to disincentivise high carbon-emitting projects, as per the IFC.
What is the difference Between SGB and Other Bonds?
- Sovereign green bonds (SGrBs) are a type of government bond issued to finance climate and environmental projects.
- SGrBs are similar to other government bonds in that they have a maturity period and carry a coupon rate, but the proceeds from their sale are used specifically for green projects.
- SGrBs are part of the government’s overall borrowing and will add to the government’s debt.
- In India, the government has announced plans to borrow INR 16,000 crore through the issuance of SGrBs in H2 FY23 as part of a larger borrowing plan of INR 5.92 lakh crore through dated securities.
Risks and Challenges
- One of the main risks associated with sovereign green bonds is the possibility of default. While the risk of default is generally low for sovereign bonds, it is important for investors to carefully consider the creditworthiness of the issuing government.
- Another challenge is the lack of standardization and transparency in the market for sovereign green bonds. This can make it difficult for investors to compare the risks and returns of different bonds.
- There is also a risk that the funds raised through the sale of sovereign green bonds may not be used effectively or may not have the intended impact on the environment. It is important for governments to carefully plan and monitor the use of these funds to ensure that they are used effectively.
-Source: The Hindu
