Sovereign Green Bond Framework
- November 10, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Sovereign Green Bond Framework
Subject: Economy
Context:
The Centre has released the framework for its proposed sovereign Green Bonds.
Details:
- An independent and Norway-based second-party opinion (SPO) provider CICERO has rated India’s green bonds framework as ‘Medium Green’ with a “Good” governance score.
- The payment of principal and interest on the Green Bonds will not depend on the performance of the eligible projects.
- Green Finance Working Committee (GFWC) wil be constituted to validate key decisions on the issuance of sovereign green bonds.
- The projects eligible to be financed or re-financed by the proceeds of Green Bond issuances fall under the following nine categories: renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, pollution prevention and control, green buildings, sustainable management of living natural resources and land use, and terrestrial and aquatic biodiversity conservation.
- Green expenditure can be in the form of equity only in the case of metro projects under the ‘Clean Transportation’ category.
- Expenditures directly related to fossil fuel are excluded.
- The Compressed Natural Gas (CNG) is allowed as an ‘eligible expenditure’ but only when it is used in public transportation projects i.e. subsidy/incentive for private transportation using CNG is excluded.
- Other excluded projects include hydropower plants larger than 25 MW, Nuclear power generation, direct waste incineration, alcohol, weapons, tobacco, gaming, palm oil industries, renewable energy projects generating energy from biomass using feedstock originating from protected areas, and landfill projects.
- All eligible Green Expenditures will include public expenditure undertaken by the Government in the form of investment, subsidies, grant-in-aids, or tax foregone (or a combination of all or some of these) or select operational expenditures, R&D expenditures in public sector projects that help in reducing the carbon intensity of the economy and enable country to meet its Sustainable Development Goals (SDGs).
- It will be endeavored that all the proceeds get allocated to projects within 24 months following issuance.
Issuance process:
Green Bonds:
- Green bonds can be issued by countries, companies and multilateral organisations to only fund projects that have positive impacts on the climate and environment and provide investors with fixed income payments.
- The government issues sovereign green bonds to allocate to fund projects associated with climate adaptation and climate mitigation.
- Proceeds from these bonds are earmarked for green projects. This is unlike standard bonds, the proceeds of which can be utilised for various purposes at the discretion of the issuer.
- The first green bond was issued in 2007 by the European Investment Bank, the EU’s lending arm. This was followed a year later by the World Bank. Since then, many governments and corporations have entered the market to finance green projects.
- These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.
- They are designated bonds intended to encourage sustainability and to support climate-related or other types of special environmental projects.
- Aims and Objectives:
- They are aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management.
- They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change.
Countries that have issued sovereign green bonds:
Belgium, Chile, Denmark, Egypt, Fiji, France, Germany, Hong Kong, Hungary, Indonesia, Ireland, Italy, Lithuania, Mexico, Netherlands, Nigeria, Philippines, Poland, Serbia, Seychelles, South Korea, Spain, Sweden and UK
A Sustainability-linked bond (SLB)
- It is a fixed income instrument (Bond) where its financial and/or structural characteristics are tied to predefined Sustainability/ESG objectives.
- The objectives are measured through predefined Key Performance Indicators (KPIs) and evaluated against predefined Sustainability Performance Targets (SPTs).
- SLBs can be used to finance any corporate activity and their proceeds do not need to be allocated to specific projects. Yet, the issuer commits to reaching ambitious, science-based and measurable Sustainability Performance Targets (SPTs) around pre-determined KPIs, and to having these reviewed by an external party.
- Bonds where the proceeds are used to finance or refinance green projects, social projects or a combination of both are called Green, social and Sustainability bonds respectively, and should not be confused with SLBs.
SLBs are bonds whereby the proceeds from the issuance are not ring-fenced to green or sustainable purposes (unlike “use of proceeds” green bonds or sustainable bonds) and may be used for general corporate purposes or other purposes.