Sovereign Green Bond: FY24’s first sovereign green bond issuance sails through

Source: The post is based on the article “Sovereign Green Bond: FY24’s first sovereign green bond issuance sails through” published in “Hindu Businessline” on 15th November 2023

Why in the News?

The first issuance of Sovereign Green Bonds for the Fiscal Year 2024 saw a successful auction of five-year maturity bonds, drawing considerable investor attention.

What are Sovereign Green Bonds?

Sovereign Green bonds are fixed interest-bearing financial instruments issued by any sovereign entity / inter-governmental organization /corporation.

The proceeds of these bonds are used only for environmentally conscious, climate-resilient projects.

In the Union Budget 2022-23, the government announced the issue of sovereign green bonds (SGrBs) as part of its market borrowings for mobilizing resources for green infrastructure.

The framework for the sovereign green bond was issued by the government in November 2022.

What are the benefits of Sovereign Green Bonds?

1. Low Risk: Since these bonds are issued by the government entity, they carry nil credit and default risk.

2. Focus on sustainable development: Green bonds are a good investment vehicle for those who are more concerned with the sustainable social development and greening of brown industries.

3. Absence of Project-Related Risks: According to the framework released by the government, investors in these bonds do not bear project related risks. This means payments of principal and interest on the issuances are not conditional on performance of the projects.

What are the risks associated with Sovereign Green Bonds?

1. Greenwashing: Greenwashing refers to the practice of making false or misleading claims about the green credentials of a company or a project. There‘s a risk that projects funded by green bonds may not deliver the expected net environmental benefits.

2. Credit Rating of Sovereign Bonds: If a government wants to go global to raise funds, it needs to improve its credit rating as all bonds issued globally are closely linked to the credit rating of the issuing country.

UPSC Syllabus: Economy