Relevance: GS-3: Conservation, environmental pollution and degradation.

Relevance: GS-2: Government policies and interventions for development in various sectors.

Key phrases: Net Zero economy, Sovereign Green Bonds, NDCs, renewable energy development, fixed-income instrument, tax incentives, Climate Change Finance Unit, SEBI.

Why in News?

• Issuance of SGBs will foster development of the green financing ecosystem by helping formalise green taxonomy, development of assurance professionals, and creation of green benchmark yield among others.

Context:

• India’s energy consumption has more than doubled since 2000, driven by a rising population and rapid economic growth. Rising emission levels due to increased energy consumption has translated into India’s average temperature increasing by 0.7 Degree Celsius over the past five decades.
• With India’s recent commitment of a Net Zero economy by 2070, green energy transition is inevitable. To mobilise resources for green energy transition in public sector projects, the government has announced the issuance of Sovereign Green Bonds (SGBs) in this year budget.
• Ministry of Finance estimates the cumulative cost of India’s current Nationally Determined Contributions (NDCs) is roughly US$3.5 trillion. As per the available statistics, roughly 90 per cent of green infrastructure financing would be mobilised through domestic financial system.
• Thus, the timely announced of SGBs during current union budget will help to not only scale up the quantum of finance required but also help widen the participation of international investors in the domestic bond market for investing in green infrastructure projects.
• As of November 2021, India’s current green bonds outstanding amount to US$12.55 billion, of which almost 75 per cent is listed on the Singapore stock exchange.
• Three-fourths of these bonds have been issued by private companies mostly involved in renewable energy development, generation, and distribution. SGBs to be issued by sovereign entities, inter-governmental groups, or alliances with the aim of using the proceeds for public projects should follow a mandatory green taxonomy.

Green Sector for Sovereign Green Bonds:

A circular issued by the Securities & Exchange Board of India (SEBI) recognizes the following sectors as green:

• Renewable and sustainable energy (wind, solar, etc.),
• Clean transportation (e-mobility, battery storage, etc.),
• Climate change adaptation,
• Energy efficiency (efficient and green buildings),
• Sustainable waste management (recycling, waste to energy etc.),
• Sustainable land use (including sustainable forestry and agriculture, afforestation) and
• Biodiversity conservation.

What should be the characteristics of India’s Sovereign Green Bonds?

India’s Sovereign Green Bonds (SGBs) landscape should have three notable characteristics:

• Firstly, create sound and verifiable green financial products in the market. SGBs are a type of fixed-income instruments which can come in various forms including revenue, project, securitized, and covered bonds. The majority of SGBs will be issued are “use of proceeds” or asset-linked bonds, meaning that proceeds are earmarked for green projects, but the instruments are backed by the issuer’s entire balance sheet.
• SGBs will typically carry additional transaction costs because the issuers must track, monitor, and report on the use of funds. Issuers may utilize external assurance professionals for transparency, audit, and verification purposes. However, initial costs can be offset by other factors, including impacts of positive marketing, highlights of green assets and business, and diversification of investor base (e.g., ESG/RI specialist investors)
• Secondly, the renewable energy sector constitutes the largest chunk of green finance today, with small allocations for energy efficiency. Difficult sectors like infrastructure, industry, transportation, and circular economy are conventionally perceived as financially unviable however need similar scale of green financing.
• Equal sectorial SGBs disbursement with provisions for monitoring and a scheme of incentives/disincentives can encourage capital flows as well as innovations. Setting up special green banks like IREDA and TCCL to cover the risks involved and mandating green financing norms by the central bank could be the other ways of enhancing the viability of such sectors
• Lastly, the cost of SGBs should be lower with longer tenure in a local currency form. Since 2018, the US$ has been the preferred currency for India’s green bond issuance which represents 99% of total green bond issuance. Once local currency SGBs demand picks up meaningfully, international fund flows into these bonds could pick up as well, especially given the possible rise in appetite for Indian bonds amid imminent bond index inclusion. This should also pave the way for increased Foreign Exchange (FX) hedging demand, impact FX forwards and potentially aid in developing the Cross – Currency swap (XCCY swap) market

Way forward:

• Given the large size of domestic market and much smaller penetration of green instruments so far, there remain vast opportunities to be tapped. In this context, some of the studies noted the importance of
  1. Increased coordination between investment and environmental policies and
  2. An implementable policy framework for both national and state levels in addressing the existing frictions.
• Therefore, developing a better information management system in India may help in reducing maturity mismatches, borrowing costs and lead to efficient resource allocation in this segment.
• While the government will have to play its role through relevant policies, the main onus lies with regulator to come out with necessary framework on issuance, governance, and monitoring of SGBs.
• Sovereign ‘green bonds’ are also very welcome, which can help mobilise financial resources for distribution companies as well as for clean energy investors.

Source: Economic Times

Mains Question:

Q. “Sovereign green bonds can, to a large extent, help realise carbon neutrality by 2070.” Illustrate the statement.