Understanding Sovereign Green Bonds

Introduction

In her Union Budget 2022 speech, Finance Minister Nirmala Sitharaman announced the issuance of sovereign green bonds as part of the government's overall market borrowings for the year. While green bonds received their due credit in India in 2017 when the Securities and Exchange Board of India issued a circular acknowledging them, it was the first time it was included as part of the Budget.

What are Green Bonds?

Green bonds are debt instruments issued by any sovereign entity, inter-governmental groups or corporations to use the proceeds for environmentally sustainable projects.

That could range from projects such as producing renewable energy like solar energy, wind energy, biogas energy, etc., to clean initiatives such as green transportation, energy-efficient infrastructure, waste management, efficient waste disposal, etc.

The main objective of green bonds is to invest in projects that will help lower the economy's carbon footprint. Given Prime Minister Narendra Modi's target to cut India's carbon emissions by 45% by 2030, this is a much-needed move that market experts also applauded.

The sovereign green bonds will be rupee-denominated and issued with long-term tenures similar to government securities to meet the country's demand for green infrastructure projects.

The Global Green Bonds Market

The Climate Bonds Market Intelligence report has estimated that the green bonds market has been steadily growing since its inception in 2007. In 2021, the demand raised an all-time high amount of $517.4 billion. According to the report, this is a 50% jump compared to the market size in the previous year. 

The top five countries in the green bonds market are the USA, Germany, China, France and UK. India stands at the 17^th position among nations issuing green bonds. In 2021, the country issued green bonds worth nearly USD 7 billion. The government's initiative to include sovereign green bonds as part of its Budget plans will certainly give the country a leg up globally.

Also Read: What is a Bond Ladder? & How to Use it to gain from Debt Funds?

Why Was This Needed?

Green and environmentally sustainable projects require significant capital investments. To meet these expenses, governments worldwide will have to issue green bonds to put in place green infrastructure in their countries. 

Green bonds are already a rage in the US and European countries. Until 2050, The United Nations' Intergovernmental Panel on Climate Change has forecasted that investments of as much as USD 3 trillion will flow in through green bonds. India is joining the list now.