Green debut – Green bonds can help lower borrowing cost

Source: The post is based on an article “Green debut – Green bonds can help lower borrowing cost” published in Business Standard on 30^th January 2023.

Syllabus: GS 3 – Economic Development

Relevance: About green bonds

News: The Reserve Bank of India (RBI) last week for the first time issued sovereign green bonds worth Rs 8,000 crore on behalf of the Government of India.

What is the present scenario of green bonds?

The government is planning to issue such bonds worth Rs 16,000 crore this year as part of the overall market borrowing programme.

Green bonds are attracting the investors who are willing to accept lower returns to support green initiatives.

Even at global level, governments have used green bonds in a limited way.

According to the International Monetary Fund (IMF), sovereign green bonds constituted only about 2 percent of the total issuance between 2016 and 2022.

Moreover, the Indian government issued green bonds as five- and 10-year securities. The yields given by green bonds are lower than the regular bonds for the same tenure. This yield difference is referred to as “greenium”.

According to the IMF, greenium is initially lower between the two bonds but as the markets emerge the yields will increase.

Amongst those who participated in the auction of green bonds were public-sector banks, insurance companies and Foreign Institutional Investors.

Moreover, the government has constituted a Green Finance Working Committee (GFWC) for optimal utilisation of the funds raised through green bonds.

What is the Green Finance Working Committee (GFWC) and what are its functions?

GFWC will support the Ministry of Finance (MoF) in selecting and evaluating green projects within the framework.

It will also supervise an annual report with details on the allocation of proceeds, project details, the status of implementation, and the level of unallocated proceeds.

The committee will have representation from relevant ministries. It will be chaired by the chief economic adviser to the government.

A mechanism has been planned to ensure funds are used only for the stated purpose. The environmental impact of projects will be brought out separately.

The proceeds will be deposited in the Consolidated Fund of India and will be made available for green projects. For this, the MoF will maintain a separate account.

What is the way ahead?

The government has also decided to engage third-party reviewers to provide annual assessments of the funds utilized for the green projects.

Hence, transparency is necessary for implementing the framework because it would help lower the cost of borrowing for the government.