Last Updated: January 25, 2023, 14:07 IST
Interest in these new types of bonds is growing because investing allows people to influence change.
Explained: The Rs. 80 billion ($984 million) issue has been promoted by authorities to the country’s largest domestic asset managers
The auction for India’s first sovereign green bond will take place today, and policymakers have laid the groundwork for a successful debut.
The Rs. 80 billion ($984 million) issue has been promoted by authorities to the country’s largest domestic asset managers, including state-run insurers and pension funds, as well as foreign investors, said a report by Money Control.
The bonds will be allowed to count toward insurers’ required infrastructure investments by the insurance industry regulator. Banks can use it to meet mandatory government holdings, and foreign buyers have no restrictions.
Let’s understand this in detail:
What’s a Sovereign Green Bond?
- Green bonds are bonds issued by any sovereign entity, inter-governmental groups or alliances, or corporations with the intention of using the bond proceeds to fund environmentally sustainable projects. On November 9, 2022, the government issued the framework for the sovereign green bond, said a report by Indian Express.
- Green Bonds have emerged as an important financial instrument for dealing with the threats of climate change and related challenges in recent years, the report explained.
- Climate change, according to the International Finance Corporation (IFC), a World Bank Group institution, threatens communities and economies, as well as agriculture, food, and water supplies.
How Do They Work?
Interest in these new types of bonds is growing because investing allows people to influence change.
Green bonds function similarly to traditional bonds, explains a report by the Balance. The bond is sold by the issuer, who then pays the buyer interest on the bond. Meanwhile, the money is being used to fund projects by the issuer. In the case of green bonds, a company, government, or organisation uses bond proceeds to fund environmental projects.
The bonds are intended to reduce climate impact by allocating some or all of the funds raised to a variety of green projects, such as:
- Improvements to energy efficiency
- Projects in clean energy technology
- Improvements to public transportation
- Developing wind farms
- Reduce your carbon footprint.
- Housing that is environmentally friendly
Green bond performance generally tracks that of larger bond indexes such as the Bloomberg Global Aggregate Index, says the report.
How Are They Beneficial?
Green bonds give one the opportunity to earn tax-free income. One will also know that there’s a good chance the money you lend to a corporation is being used responsibly. Companies that use green bonds for funding benefit as well. The green angle attracts an increasing number of people who are aware of and want to help combat climate change, the report by Balance says.
Higher demand for green bonds equals lower borrowing costs. Lower costs imply lower business spending. These savings are either distributed to you as a dividend or used to reduce the cost of funds.
What Inspired Green Bonds?
The Intergovernmental Panel on Climate Change (IPCC), a United Nations agency that provides scientific data on climate change and its political and economic consequences, issued a report in 2007 that linked human activity to global warming. In late 2007, a group of Swedish pension funds sought to invest in climate-friendly projects. The World Bank became the first institution to issue a green bond less than a year later, in November 2008, raising funds from fixed-income investors to support lending for eligible climate-focused projects. In response to investors seeking fixed-income climate-related investments, IFC issued its first green bonds in 2010.
Then, in 2013, IFC issued the market’s first global US dollar benchmark-sized green bonds, with two $1 billion issuances that year; this established a precedent as the largest green bonds at the time of issuance and helped to cement the mark, a report by World Bank explained.
Examples of Green Bonds
According to Investopedia, the World Bank is a major issuer of green bonds, having issued $14.4 billion between 2008 and 2020. These funds have been used to support 111 projects around the world, with the majority of them focusing on renewable energy and efficiency (33%), clean transportation (27%), and agriculture and land use (15%).
One of the bank’s first green issuances financed the Rampur Hydropower Project, which aimed to supply low-carbon hydroelectric power to the electricity grid of northern India. It generates nearly 2 megawatts per year and saves 1.4 million tonnes of carbon emissions, thanks to green bond issuances.
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