Green yields – Transparency will be critical for green bonds

Source: The post is based on the article “Green yields – Transparency will be critical for green bonds” published in the Business Standard on 14th November 2022.  

Syllabus: GS 3 – Indian economy

Relevance: About India’s Sovereign Green Bonds Framework

News: Union government issued a robust framework for sovereign green bonds. This will allow the government to issue green bonds as announced in the Union Budget.

What are Green Bonds?

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About India’s Sovereign Green Bonds Framework

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Funds: The funds raised by green bonds will be deposited as usual in the Consolidated Fund of India. However, a separate account will be maintained by the finance ministry to make funds available for green projects.

Green Register: The Finance ministry will set up an information system to maintain a “Green Register” with details such as the bond issuances, funds raised, and allocations made.

Annual assessment: The government further intends to involve an external third-party reviewer to provide an annual assessment of allocation.

What is the need for Sovereign Green Bonds Framework?

Need resources for India’s climate commitments: A report submitted to the United Nations Framework Convention on Climate Change showed that India’s emission intensity declined by 24% between 2005 and 2016. It has committed itself to reduce the emission intensity of a gross domestic product by 45% by 2030 compared to the level of 2005.

This would obviously need resources and investment in a variety of areas, and green bonds are one of the enabling factors for investment

To take advantage of Greenium: “Greenium” is defined as the yield difference between similar conventional bonds and green bonds. It is higher in developing economies.

For instance, according to estimates, greenium in emerging markets is about 49 basis points for dollar-denominated bonds. The same is 5-6 basis points in advanced economies. The difference can partly be explained by the usual yield difference between advanced and emerging economies.

What are the challenges with Sovereign Green Bonds Framework?

a) A sustained higher fiscal deficit and inflation could undermine the potential of green bonds, b) India lacks transparency in the proceeds of green bonds, c) History shows that the government often doesn’t spend on the stated purpose for which the funds are raised as is the case in various kinds of cess and surcharge levied.

But the overall conditions in the framework should be able to boost transparency.