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BL Explainer – What’s different about sovereign green bonds?

sovereign green bonds

What’s different about sovereign green bonds?

A bond is a tool for debt financing. According to the OECD (Organization for Economic Co-operation and Development), it is not novel to use bonds to directly finance sizable LCR (Low-Carbon and Climate-Resilient) infrastructure projects or to finance financing. However, a market for bonds that are officially labelled or classified as “green” has evolved since 2007. A green bond is distinguished from a standard bond by this designation, which denotes a promise to only utilise the money obtained to finance or refinance “green” initiatives, assets, or commercial ventures. They are known as sovereign green bonds when they include guarantees from the government or a sovereign regarding the repayment of the principle and payment of interest (SGrB).

Sovereign green bonds

How are the green bond projects chosen?

A project is given a “green” designation based on four fundamental principles. These include fostering climate resilience, enhancing natural ecosystems and biodiversity, encouraging energy efficiency in resource utilization, and lowering carbon emissions and greenhouse gas emissions (Sustainable Development Goals).

When will likely be the first sovereign green bond issued?

The government would issue sovereign green bonds in 2022–2023 as part of its overall market borrowings, according to Finance Minister Nirmala Sitharaman, in order to raise money for green infrastructure. The funds raised will be used for government initiatives that lower the economy’s carbon intensity. In light of this, the government and RBI have decided to issue SGrB in the October to March timeframe of FY23, though the precise date has not yet been disclosed. These bonds will most likely be issued during the quarter from January to March.

What distinguishes them from traditional government bonds? Will they increase the total amount of government debt?

Treasury Bills and dated or long-term securities are the two standard categories for government bonds or government securities (G-Secs). Treasury Bills do not have coupon rates and have a maturity of less than a year. These are redeemed at face value but are issued at a discount. At the same time, securities with a maturity longer than one year or up to forty years are issued. These bonds have coupon rates and can be traded on the stock exchange. One type of outdated security is SGrB. It will have an interest rate and tenor. The sum of the funds raised by SGrB is included in total government borrowing.

What is the intended sum to be raised through these issuances?

In order to borrow 5.92 lakh crore through dated securities in H2 FY23, including 16,000 crore through the issue of SGrBs, the government and the RBI determined.

Who are the most likely purchasers of these bonds?

Investors from outside and at home are anticipated to be interested in SGrB. One theory is that overseas investors might be a little apprehensive because of currency risk.

Have other nations also issued these bonds? How well have they been accepted abroad?

The Green, Social, and Sustainability (GSS) bonds category includes SGrB, according to the Bank for International Settlements (BIS) database. The first green bond ever issued was a Climate Awareness Bond from the European Investment Bank in 2007. In November 2008, the World Bank issued its first green bond, which was the first to specify project eligibility and guarantee, through a third-party provider of an opinion, that qualified projects will address climate change.