Sovereign Green Bonds

Sovereign Green Bonds

Subject : Economy

Context:

The Indian government is all set to debut in the green bonds market soon, as laid out in the Union Budget.

Details:

• The Finance Minister in her Budget 2022 speech promised to issue sovereign green bonds.
• Indian companies have already been tapping into the international green bond market through segments beyond green bonds, among which sustainability linked bonds (SLBs) .

What is the Significance of Sovereign Guarantee to Green Bonds?

• Sovereign green issuance sends a powerful signal of intent around climate action and sustainable development to governments and regulators.
• It will catalyze domestic market development and provide impetus to institutional investors.Thus, bring in a new set of investors to India’s debt market
• It will provide benchmark pricing, liquidity and a demonstration effect for local issuers, helping to support the growth of a local market.
• Sovereign green bonds can support the proliferation of electric buses and allied charging infrastructure in India by providing cost-effective financing options. Thus, bring in much needed capital for its green transition. 

Concept:

• Corporates have been issuing green bonds in India but the country’s global share stood at just 1% in the first half of 2022.
• It is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. 
• 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.