Sovereign Green Bonds (SGrBs)

Ministry of Finance has approved the final Sovereign Green Bonds (SGrB) framework of India.

As announced in the Union Budget 2022-23, Government of India, as part of its overall market borrowings, will be issuing Sovereign Green Bonds (SGrBs), for mobilising resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.

A ‘green project’ classification is based on the following principles:

• Encourages energy efficiency in resource utilization
• Reduces carbon emissions and greenhouse gases
• Promotes climate resilience and/or adaptation
• Values and improves natural ecosystems and biodiversity especially in accordance with SDG principles.

A Green Bond is a type of debt security created for funding or re-funding projects contributing positively to the climate and/or ecosystem.

The significant difference between Green Bonds and ordinary bonds is that the funds raised are only used to support initiatives that have a good influence on the environment, such as green construction, renewable energy etc.

When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB).

In 2017, SEBI, in a circular proposed a definition of 'green  debt  securities'.  A  debt  security  could  be considered 'green' if the funds are to be utilized for projects such as: Renewable  and  sustainable  energy,  Clean transportation,  Sustainable  water  management,  Climate change adaptation, Energy efficiency etc.

Eligible projects will use the raised proceeds from sovereign green bonds for capitalisation or re-capitalisation.

Eligible projects

1. Renewable energy
2. Energy efficiency
3. Clean Transportation
4. Climate Change adaptation
5. Sustainable water and waste management
6. Pollution prevention and control
7. Sustainable management of natural resources
8. Green Buildings
9. Aquatic biodiversity conservation

Excluded projects

• Projects involving new or existing extraction,
• Production and distribution of fossil fuels, including improvements and upgrades
• Nuclear power generation
• Direct waste incineration
• Alcohol, weapons, tobacco, gaming, or palm oil industries.
• Renewable  energy  projects  generating  energy  from  biomass  using feedstock originating from protected areas
• Landfill projects
• Hydropower plants larger than 25 MW

Expenditures directly related to fossil fuel are excluded. However, investments/expenditures aimed at a relatively cleaner Compressed Natural Gas (CNG) is allowed as an ‘eligible expenditure’ when used in public transportation projects only. Subsidy/incentive for private transportation using CNG is neither envisaged nor included.

Green Finance Working Committee (GFWC) will support Ministry of Finance with selection and evaluation of projects.

The proceeds of Sovereign green bonds will be deposited to Consolidated Fund of India (CFI), and then funds from the Consolidated Fund of India will be made available for eligible green projects.

Public Debt Management Cell will keep a track of proceeds.

The framework of Sovereign green bonds complies with four components of International Capital Market Association Green Bond Principles (2021), which are:

1. Use of proceeds.
2. Project evaluation and selection.
3. Management of proceeds.
4. Reporting.

‘Greenium’ (Green Premium): Greenium refers to pricing benefits based on the logic that investors are willing to pay extra in exchange for sustainable impact. According to estimates, greenium in emerging markets is about 49 basis points for dollar-denominated bonds.

The Reserve Bank of India, in consultation with the Government of India, has decided to notify the indicative calendar for issuance of SGrBs for the fiscal year 2022-23. The issuance calendar is as under:

Benefits to investors:

1. Investing in Green Bonds can be seen as an active decision by investors to “do their bit” and allocate capital in a way that makes a significant difference in the fight against climate change.
2. Green Bonds also tend to exhibit lower volatility than conventional bonds, making them a more attractive proposition for many investors.
3. When a company issues green bonds, it is also making a statement that it is at the forefront of transition, and investors work on the basis that such companies should carry less risk going forward.

MAINS

India’s commitment to the preservation of the environment is enshrined in Article 48-A of the constitution. Over the years, India has taken steps both at national and sub-national levels to balance environmental sustainability with economic growth. Initiatives such as the Namami Gange Mission, plastic waste management, National Clean Air Programme are a few examples of these.

As a populous, tropical developing country, India faces a bigger challenge in coping with the consequences of climate change than most other countries. Climate Change is a global phenomenon but with local consequences. Realizing this, the National Action Plan on Climate Change (NAPCC) was launched in 2008 with eight National Missions. The NAPCC aims at fulfilling developmental objectives with a focus, inter alia, on reducing emission intensity of the economy, improving energy efficiency, increasing the forest cover and developing sustainable habitat standards.

The National Adaptation Fund on Climate Change (NAFCC) was launched in 2015 with an objective to enhance the adaptive capacity of the most vulnerable sections of the population and ecosystems focusing on the climate-sensitive sectors such as agriculture, water, forestry and the coastal and Himalayan ecosystem.

Background of India's commitments and state policies

India adopted an ambitious Nationally Determined Contribution (NDC) under the Paris Agreement on a ‘best effort basis’ keeping its developmental imperatives in mind.

The NDC targets announced in 2015 were to :

1. Reduce emission intensity of GDP by 33-35 per cent by 2030 as compared to 2005 levels;
2. Create an additional carbon sink of 2.5 to 3 billion tonnes of CO2 equivalent through additional forest and tree cover by 2030
3. Increase the share of non-fossil fuel-based energy resources to 40 per cent of installed electric power capacity by 2030. India’s commitments under the United Nations Framework Convention on Climate Change (UNFCCC) and its Paris Agreement reflect the principle of equity and the principle of common but differentiated responsibilities and respective capabilities in the light of national circumstances.

India’s third biennial update report submitted to the UNFCCC in 2021 reports a reduction in emission intensity between 2005 to 2016 to be 24 per cent. According to the Central Electricity Authority, India’s share of non-fossil fuel sources in installed capacity of electricity generation increased from 30.5 per cent in March 2015 to 40.2 per cent at the end of December 2021.

Further, the National Hydrogen Mission for generating hydrogen from green energy sources which aims to use hydrogen blended with CNG as a transportation fuel and an industrial input to refineries to lower carbon emission and improve air quality has also been announced.

At COP 26, India underlined the need to start the one-word movement 'LIFE' which means 'Lifestyle For Environment' urging for mindful and deliberate utilization instead of mindless and destructive consumption of natural resources. The Hon’ble Prime Minister of India in Glasgow in November 2021 further enhanced the ambition on addressing climate. These include five nectar elements (Panchamrit) of India’s climate action:

1. Reach 500GW non-fossil energy capacity by 2030
2. 50 per cent of its energy requirements from renewable energy by 2030
3. Reduction of total projected carbon emissions by one billion tonnes from now to 2030
4. Reduction of the carbon intensity of the economy by 45 per cent by 2030, over 2005 levels
5. Achieving the target of net zero emissions by 2070

India now stands committed to reduce Emissions Intensity of its GDP by 45 percent by 2030, from 2005 level and achieve about 50 percent cumulative electric power installed capacity from nonfossil fuel-based energy resources by 2030

Context For Indian Sovereign Green Bonds

In keeping with the ambition to significantly reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issue of Sovereign Green Bonds (para 103). The budget para 103 is reproduced as below:

‘As a part of the government’s overall market borrowings in 2022-23, sovereign Green Bonds will be issued for mobilizing resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.’

The issuance of Sovereign Green Bonds will help Government of India (GoI) in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy.

This Green Bond Framework (Framework) sets forth the obligations of the Government of India as a Green Bond issuer.

The Framework applies to all sovereign Green Bonds issued by the Government of India. Payments of principal and interest on the issuances under this Framework are not conditional on the performance of the eligible projects.

Investors in bonds issued under this Framework do not bear any project related risks. Department of Economic Affairs, Ministry of Finance reserves the right to modify this Framework according to international best practices or in accordance with the Government of India’s international commitments and environmental priorities. Changes to the Framework will be reviewed by an independent provider.

The framework is designed to comply with four components and key recommendations of the International Capital Market Association (ICMA) Green Bond Principles (2021).

These principles recommend delineation of a clear process and disclosure by the issuer to enable the investors and banks and others to understand the characteristics of the green bond.

The Four Core Components as outlined by ICMA green bond principles are:

1. Use of proceeds;
2. Project evaluation and selection;
3. Management of proceeds; and
4. Reporting. 

In order to improve transparency, the ICMA also recommends that:

• The issuer set out a Green Bond Framework which is accessible to the investor.
• Advises the issuer to provide for an external review.

Constitution Of The Green Finance Working Committee (GFWC)

Green Finance Working Committee GFWC has been established with clear lines of authority to oversee and validate key decisions on issuance of Sovereign green bonds under the Chairmanship of Chief Economic Adviser, Government of India and members from implementing departments, Ministry of Environment, Forests and Climate Change (MoEFCC), Niti Aayog (India’s premier public policy think-tank), Budget Division of Department of Economic Affairs (DEA) and Infrastructure Finance Secretariat, DEA (Figure 1).

The Features of the Sovereign green bonds issuance will be as under:

1. Issuance Method: Sovereign green bonds will be issued through Uniform Price Auction.
2. Non-competitive bidding facility: Five per cent of the notified amount of sale will be reserved for retail investors as specified under the ‘Scheme for Noncompetitive Bidding Facility in the auction of Government of India Dated Securities and Treasury Bills’.
3. Eligibility for Repurchase Transactions (Repo): Sovereign green bonds will be eligible for Repurchase Transactions (Repo) as per the terms and conditions mentioned in Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018 as amended from time to time.
4. Eligibility for Statutory Liquidity Ratio (SLR): Sovereign green bonds will be reckoned as eligible investment for SLR purpose.
5. Underwriting: The underwriting in the auction of Sovereign green bonds by the Primary Dealers will be as per the “Revised Scheme of Underwriting Commitment and Liquidity Support” issued by the Reserve Bank.
6. Tradability: Sovereign green bonds will be eligible for trading in the secondary market.
7. Investment by Non-residents: Sovereign green bonds will be designated as specified securities under the ‘Fully Accessible Route’ for investment in Government Securities by non-residents.

Management Of Proceeds

1. The proceeds will be deposited to the Consolidated Fund of India (CFI) in line with the regular treasury policy, and then funds from the CFI will be made available for eligible green projects.
2. For the purposes of ensuring that the proceeds’ allocation and accounting is transparent, clear and beyond doubt, a separate account will be created and maintained by the Ministry of Finance Government of India.
3. Public Debt Management Cell (PDMC) will keep a track of proceeds within the existing guidelines regarding debt management, and monitor the allocation of funds towards eligible green expenditures.
4. Unallocated proceeds, if any, will be carried forward to successive years for investment in eligible green projects only.
5. It will be endeavoured that all proceeds are allocated within a span of two years from the date of issuance.
6. Ministry of Finance will set up a dedicated information system with a view to maintaining a complete Green Register including the details of the green bond issuance, proceeds generated, allocations made to eligible projects including information about the eligible projects (summary of the project details, allocation of proceeds to each project, expected climate impact and the extent of unallocated proceeds, both aggregate as well as project-wise).
7. An amount at least equal to the net proceeds from the completed issuances under this Framework will be allocated to the financing and/or refinancing of expenditures that meet the eligibility criteria.

The External Review will be conducted to:

• Verify that utilization of proceeds is in accordance with stated objectives of use of proceeds as mentioned in the Framework
• Assess the management of proceeds and of unallocated proceeds.

External Review

1. Second Party Opinion : This Green Bond Framework has been reviewed by CICERO which has issued an independent Second Party Opinion. It has approved the alignment of the Sovereign Green Bond Framework of the Government of India with the ICMA Green Bond Principles (2021). 
2. Post Issuance External Verification : To provide timely and transparent information about the reporting of the allocation of funds from SGrBs issued under this framework, Government of India intends to engage a third-party external reviewer to provide an annual assessment on the alignment of the allocation with the framework’s criteria. 

Sources - RBI and DEA