Is It High Time for SGBs?
Companies, nations, and international organisations all offer green bonds, which guarantee fixed-income payments to investors while only funding initiatives that benefit the environment or the climate. The initiatives could involve, among other things, green buildings, sustainable transportation, and renewable energy.
These bonds’ earnings are designated for environmental projects. This is different from regular bonds, which allow the issuer to use the proceeds for a variety of things. Since the market’s launch in 2007, there have been cumulative issuances on the global green bond market totalling more than USD 1 trillion.
According to the London-based Climate Bonds Initiative, by the end of 2020, 24 national governments would have issued sovereign green, social, and sustainability bonds worth a total of USD 111 billion.
Why Is The World In Need Of Green Sovereign Bonds?
We must act rapidly to meet our target of reducing carbon emissions by 45% before 2030. Consider switching our electrical demands to renewable energy sources or have perhaps more electric public transportation options.
But we need money first to put this vision of climate-friendly policies into action. We’ve already spent a tonne of cash on coal-based and other environmentally unfriendly projects in the past. Additionally, we are unable to finance green energy initiatives by just printing money. They are expensive.
But what if you could appeal to people’s good nature and get organisations to pool their resources in support of the cause? Pay them interest for their difficulties in exchange for their admirable objectives. similar to any other bond or loan.
A Green Bond is specifically useful in that situation. India made a move in this direction last week. In FY23, the RBI said it would issue 16,000 crores in Sovereign Green Bonds (SgrBs). It will be the Indian government’s first green bond. And we’re joining a group of at least 25 other nations who have previously issued sovereign green bonds.
How Is This Different From Any Other Government Bond Issued?
The government is free to do whatever it wants with the money it raises through a standard sovereign bond. It is not necessary to explain to the investor how their money will be used. The investor is equally unconcerned. They are simply interested in occasionally gaining an interest. and that the money would be returned as promised after the term. A green bond, however, is a bit different. It is solely connected to a particular collection of initiatives that work to lessen greenhouse gas emissions or strengthen the climate resilience of cities. Therefore, eco-aware investors are confident that their money is supporting a worthwhile cause. and not for the construction of another coal plant.
Additionally, investors are frequently prepared to accept a lower interest rate for these investments because they feel good about helping the environment. The geranium is the name of it.
But just like anything else, there can be problems with green bonds as well. Investors may take issue with greenwashing.
What Does This Imply?
The majority of issuers adhere to the International Capital Market Association’s principles, which are located in Switzerland (ICMA). Yes, it does to a certain extent by providing the structure for project selection, evaluation, and reporting. However, it is still only a principle. It is not a rule. It is ultimately the responsibility of the nation issuing the green bond to act morally.
So the proceeds from a green bond may be used by a state-owned oil and gas corporation to fund a wastewater management project. or to install carbon capture equipment at a state-run steel mill. Or perhaps to a multifaceted firm that operates quick fashion in addition to producing eco-friendly building materials.
It has a thorough framework that checks all the right boxes. Additionally, it is very clear what it won’t support, including the production of nuclear power, the direct burning of garbage, and the construction of biomass power plants using biomass from protected areas. But it has advanced the situation. For instance, these projects have significantly harmed the Himalayas even though hydropower is a renewable energy source (from water). Therefore, any hydroelectric project larger than 25MW has been disqualified.
Even a Green Finance Working Committee (GFWC) will be established to ensure that the guidelines are implemented. that the proper projects receive funding. That process is being watched. even periodic reports that are created to illustrate outcomes.
The government could use the proceeds from the green bonds to fund the construction of the infrastructure for electric railways, according to the Oslo-based CICERO, which evaluated the concept. But what if it results in more freight being transported to sectors that produce a lot of carbon emissions? How would you explain that?
These are minor issues, but, for the time being. And it’s challenging to eliminate each of these warning signs. There will undoubtedly be slip-ups. The only thing left for us to do is to keep an eye on things, learn from our errors, and gradually improve. Let’s praise India’s attempt to capitalize on the global craze and finance its green objectives, with issuances of sovereign green bonds increasing from roughly $40 billion in 2020 to $90 billion in 2021.