Green debut

Green bonds can help lower borrowing cost

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. The initial announcement in this regard was made by Union Finance Minister Nirmala Sitharaman in her 2022 Budget speech. The government had later announced it would issue such bonds worth Rs 16,000 crore this year as part of the overall market borrowing programme. There are investors who are willing to accept comparatively low returns to support green initiatives. Some institutional investors are also mandated to invest part of their corpus in such instruments. Corporations engaged in green businesses, as a result, manage to raise funds at relatively low rates. Globally, governments have used green bonds in a limited way so far. According to the data presented in a 2022 International Monetary Fund (IMF) note, sovereign green bonds constituted only about 2 per cent of the total issuance between 2016 and 2022.
 

The government issued green bonds as five- and 10-year securities. In the first auction, yields were lower than the regular bonds of the same tenure by five-six basis points. The yield difference is referred to as “greenium”. According to numbers compiled by the IMF, greenium for emerging markets in dollar-denominated bonds was about 49 basis points. It also showed that the difference was small in the beginning and increased over time. It is thus likely that as demand for such bonds increases, the RBI will be able to price them more aggressively. As this newspaper has reported, the first tranche of green bonds was lifted largely by public-sector banks and insurance companies. Foreign institutional investors were also reported to have invested about Rs 700 crore in them. The greenium in advanced economies is five-six basis points. The difference in greenium between the advanced and emerging markets can be attributed to the regular bond-yield difference, though yields have now risen significantly in developed economies.
 

To be able to attract a large pool of investors willing to support the government’s initiative, it is important that funds raised are used transparently for the stated purpose. The government issued a comprehensive note last year, detailing its obligations in this regard. The Ministry of Finance (MoF) reported it had constituted a Green Finance Working Committee (GFWC), with representation from relevant ministries. The committee will be chaired by the chief economic adviser to the government. It will support the MoF in selecting and evaluating green projects within the framework. The GFWC 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 environmental impact of projects will be brought out separately. Crucially, to ensure funds are used only for the stated purpose, a mechanism has been planned. While the proceeds will be deposited in the Consolidated Fund of India, they will be made available for green projects. The MoF will maintain a separate account for this purpose. It will also maintain a green register with details like issuance and allocation of funds. Further, the government intends to engage third-party reviewers to provide annual assessments. Transparently implementing the framework would help lower the cost of borrowing for the government in driving the much-needed green transition.