Mint Explainer: Why the government is embracing sovereign green bonds

The Reserve Bank of India (RBI) on Monday opened bidding for a new tranche of sovereign green bonds. This Centre has issued 5,000 crore worth of 30 year bonds with another similar tranche likely by the end of the month. That will complete the plan to issue 20,000 crore worth of sovereign green bonds for the current fiscal year.

The government had issued five year sovereign green bonds worth 5,000 crore in November and 10 year paper worth 5,000 crore in December. India joined the sovereign green bonds club in January of last year with an 8,000 crore issuance, followed by a similar tranche in February. Plans to raise funds via green bonds were first announced in the Union Budget for 2022 23.

After that, the finance ministry published the Sovereign Green Bond Framework. The Union budget, to be presented on 1 February, may propose issuance of sovereign green bonds worth at least 20,000 crore as part of the borrowing programme for fiscal year 2025 (FY25). How are sovereign green bonds different from other bonds issued by the government? Sovereign green bonds are distinct, as they fund public sector green infrastructure projects aimed at reducing carbon emissions and meeting India's Paris Agreement and net zero commitments.

The funds can be allocated in the form of investments, subsidies, grants in aid, or select operational expenses, even covering expenditures from the previous 12 months. The goal is to allocate proceeds to projects within 24 months, with unutilized funds rolling over to the next year for green initiatives.

In line with standard government accounting practices, the proceeds are deposited into the Consolidated Fund of India, with subsequent transfers to eligible green projects. The finance ministry maintains a separate account to ensure transparent tracking of the funds. What qualifies as a green project? The finance ministry has clearly outlined the criteria for green project eligibility under the sovereign green bonds scheme.

Projects that enhance energy efficiency, reduce emissions, foster climate resilience, and support natural ecosystems and biodiversity, in line with India's Sustainable Development Goals, are eligible. Renewable energy, low carbon buildings, public transport electrification, and efficient water systems are among the projects that qualify.

However, fossil fuel production, nuclear power, large hydropower plants, and waste incineration are excluded. Can investors expect better returns from green bonds? Not really. Investors in green bonds typically see lower yields compared to traditional bonds, given the focus on sustainability. The yield gap, known as ‘greenium,’ reflects the environmental value of these bonds.

A finance ministry official, as reported by , had indicated that green bonds should offer lower yields than conventional bonds, with a target yield below 6.8% if traditional bonds yield between 7 7.2%. However, the yield difference has been marginal in past issuances. For instance, the November green bonds had a modest discount of 2 basis points, and the January 2023 issue offered a coupon rate about 5 basis points lower than sovereign yields.

Projects supported by sovereign green bonds so far In fiscal year 2022 23, the 16,000 crore raised through green bonds was primarily allocated to renewable energy projects, with 6,200 crore dedicated to this sector. Additional funds were earmarked for initiatives under the ministries of railways, housing and urban affairs, and environment, forest and climate change, demonstrating the bonds' significant contribution to sustainable development in India..