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GS 3 > Economic Development > Indian Economy and Issues > Financial market
REFERENCE NEWS:
The Reserve Bank of India (RBI) recently allowed Foreign Institutional Investors (FIIs) to invest in India's Sovereign Green Bonds (SGrBs).
MORE ON NEWS:
At present, foreign portfolio investors (FPIs) registered with SEBI are permitted to invest in SGrBs under the different routes available for investment by FPIs in government securities.
Foreign Direct Investment (FDI): FDI involves investors from one country acquiring a controlling interest in a business in another country, either by creating a new business or by buying a significant stake in an existing one. This type of investment is characterized by significant control and long-term commitment.
Foreign Portfolio Investment (FPI): FPI entails the purchase of foreign financial assets like stocks and bonds, which do not confer control over the businesses. These investments are generally more liquid and focused on earning financial returns without influencing management.
Foreign Institutional Investor (FII): FIIs are institutions (like pension funds and mutual funds) registered abroad that invest in another country's financial markets primarily through FPI. They do not seek to control the businesses in which they invest but focus on portfolio returns.
WHAT ARE GREEN BONDS?
Green Bonds are debt securities issued by governments, financial institutions, or corporations where the proceeds are exclusively applied to finance or refinance projects that benefit the environment. These projects typically include renewable energy, energy efficiency, sustainable waste management, water conservation, and pollution reduction initiatives.
WHAT ARE SOVEREIGN GREEN BONDS?
Sovereign Green Bonds are a subset of green bonds issued by national governments. The key distinction is that these are backed by the sovereign credit of the issuing country, which often results in lower risks for investors and potentially makes these bonds more attractive compared to corporate green bonds.
SOVEREIGN GREEN BONDS IN INDIA
In India, the decision to issue Sovereign Green Bonds was announced by Finance Minister Nirmala Sitharaman during the 2022-23 Union Budget.
The initiative reflects India's commitment to funding environmentally sustainable projects to meet its ambitious climate targets, including achieving a net-zero carbon footprint by 2070 as outlined by Prime Minister Narendra Modi at COP26 in Glasgow.
SGrBs typically offer lower yields compared to conventional government securities (G-Secs). This lower yield, known as a "greenium," is accepted by investors as a trade-off for contributing to environmental projects. Despite the lower financial returns, these bonds are attractive due to their contribution to sustainability, backed by regulatory support, especially from developed countries.
SGrB FRAMEWORK
In response to the need for a standardized approach to evaluate the environmental impact of funded projects (and to prevent greenwashing), the Indian government introduced its first SGrB Framework in November 2022.
This framework details the types of projects that qualify for funding, aiming to ensure that investments genuinely contribute to sustainability.
These projects include investments in solar, wind, biomass, and hydropower energy projects (under 25 MW) with integrated energy storage; improvements to public lighting such as LED replacements; construction of new low-carbon buildings and energy efficiency retrofits for existing ones; reductions in electricity grid losses; promotion of public transport; subsidies for electric vehicles (EVs); and the development of EV charging infrastructure.
Greenwashing is a term used to describe a false, misleading or untrue action or set of claims made by an organization about the positive impact that a company, product or service has on the environment.
SIGNIFICANCE OR ADVANTAGES OF SOVEREIGN GREEN BONDS
Facilitating Sustainable Development: SGrBs are crucial for funding projects that reduce carbon intensity and support India's "Panchamrit" climate action goals. These goals are ambitious: reaching 500GW of non-fossil energy capacity, deriving 50% of energy from renewable sources, reducing carbon emissions by one billion tonnes by 2030, decreasing carbon intensity by 45%, and attaining net-zero emissions by 2070. These efforts align with the Paris Agreement and foster broader sustainability goals.
Economic Impact and Currency Stability: By issuing SGrBs in the local currency and targeting predominantly domestic investors, these bonds enhance the funds within the central bank, reflecting strong investor confidence and bolstering the stability of the Indian currency. This strategy strengthens the national economy and addresses key environmental concerns.
Cost-Effective Capital: Targeting socially responsible investors interested in sustainability allows SGrBs to often be issued at lower costs compared to conventional bonds, driven by high demand.
Mitigating Currency Risk: Issuing bonds in Indian rupees minimizes exposure to foreign exchange volatility, contributing to the stability of the local currency and making these bonds more attractive to foreign investors due to potentially higher yields than traditional debt instruments.
Broadening Investor Base: The issuance of green bonds appeals to a diverse range of investors, including international sustainable investment funds, which is especially advantageous for emerging markets like India.
Investment Diversification: SGrBs provide opportunities for investors to diversify their portfolios with investments that are both financially viable and environmentally beneficial.
Attracting Foreign Investment: High demand and limited supply of green bonds lead to higher prices and yields, drawing significant foreign investment and supporting India's financial stability in the global market.
Global Context and Learning: The global market for green bonds has seen significant growth, with countries like Fiji, Indonesia, Egypt, and Malaysia adopting this financing mechanism despite facing unique challenges. India can leverage lessons from both developed and emerging economies to enhance its green finance initiatives, adopting best practices and innovative strategies suited to its context.
Promoting Market Development and Innovation: Funds raised through SGrBs are invested in developing green technology sectors, encouraging the growth of new industries and technological advancements.
Enhancing Transparency and Accountability: The green bond issuance process includes stringent reporting on how funds are used and their environmental impacts, which builds trust among investors and increases market transparency.
Raising Awareness: The process of issuing SGrBs helps educate both the public and investors about environmental issues and the importance of sustainable practices, broadening support for green initiatives.
CHALLENGES ASSOCIATED WITH INDIA'S SOVEREIGN GREEN BONDS (SGrBs):
Awareness and Education: The growth of green bonds is constrained by a lack of awareness about their principles and benefits, especially in emerging markets. Enhancing investor education on the financial returns and environmental impacts of green bonds is crucial for boosting participation and leveraging government incentives.
Standardization and Regulation: India faces challenges due to the lack of standardized procedures for green bond project selection and certification. This lack complicates investment decisions, as assessing financial risks and sustainability becomes difficult. The absence of specific regulations also undermines the credibility and long-term viability of these investments.
Green Taxonomy and Verification: The absence of a comprehensive green taxonomy complicates the assessment of investments’ environmental impacts, increasing the risk of greenwashing. Establishing clear environmental criteria is crucial for maintaining transparency and credibility in the green bonds market.
Framework Implementation: The successful implementation and enforcement of India’s SGrB Framework are crucial. Robust monitoring and evaluation mechanisms are necessary to ensure that funded projects align with environmental criteria and contribute genuinely to sustainability.
Project Selection and Impact: It is essential to select green projects with credible audit trails and significant environmental impact. Projects focusing on renewable energy and clean energy transitions for MSMEs often face difficulties in attracting adequate funding due to limited private capital exposure.
Project Pipeline: Maintaining a consistent pipeline of eligible green projects, especially in high-capital sectors like offshore wind and solar power production, is challenging. Active government promotion and incentives are crucial to ensure a steady flow of investment opportunities.
Availability of Suitable Projects: Securing a continuous supply of projects suitable for green bond funding, particularly in innovative and high-investment areas such as Electric Vehicles (EVs), is essential. The government needs to foster and incentivize the development of these projects to maintain a robust investment stream.
WAY FORWARD:
Enhancing Transparency: Strengthen transparency in green bond issuance by adopting models such as the Luxembourg Green Exchange (LGX), which provides clear visibility and detailed information on green securities, thereby bolstering investor confidence and trust in the market.
Specialized Awareness Programs: Launch comprehensive educational initiatives to increase investor knowledge about green bonds, focusing on the financial and environmental benefits. These programs can help demystify green bonds and showcase successful case studies to encourage broader participation.
Risk Mitigation: Develop and enforce a robust legal framework that effectively addresses defaults and reduces investment risks, such as legal uncertainties, liquidity issues, and interest rate volatility. This framework should provide a stable economic environment that reassures investors and attracts more investment into green projects.
Domestic Capital Focus: Prioritize building a substantial domestic green capital pool by integrating green investments into the portfolios of major institutional investors such as the Pension Fund Regulatory and Development Authority (PFRDA) and the Insurance Regulatory and Development Authority of India (IRDAI). This strategy is aimed at stimulating local demand for green bonds and increasing the overall investment in sustainability initiatives.
Adherence to International Standards: Ensure Sovereign Green Bonds align with international sustainable development goals and best practices, maintaining investor trust and competitiveness, while preventing greenwashing.
Regulatory Guidance and Support: Urge the Reserve Bank of India (RBI) to offer clear, standardized guidelines for green investments, supporting the market through resource mobilization and expert advice to foster collaboration between issuers and investors.
PRACTICE QUESTION:
Q. Discuss the role of Sovereign Green Bonds (SGrBs) in advancing India's environmental objectives and economic development. (10 marks, 150 words)
