Sovereign Green Bonds Framework: Final Sovereign Green Bonds framework has been Approved

About Sovereign Green Bonds Framework

• Sovereign Green bonds are financial instruments that generate proceeds for investment in environmentally sustainable and climate-suitable projects.
• By virtue of their indication towards environmental sustainability, green bonds command a relatively lower cost of capital vis-à-vis regular bonds and necessitate credibility and commitments associated with the process of raising bonds.

Why is Sovereign Green Bonds Framework in news?

Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman approved the final Sovereign Green Bonds framework of India.

Why Sovereign Green Bonds Framework is Important for UPSC

• Sovereign Green Bonds Framework is important for both UPSC Environment & Ecology Section as well as Economy Section.
• As Sovereign Green Bonds Framework will further strengthen India’s commitment towards its Nationally Determined Contribution (NDCs) targets, adopted under the Paris Agreement, and help in attracting global and domestic investments in eligible green projects.
• Also, the proceeds generated from issuance of such bonds will be deployed in Public Sector projects which help in reducing the carbon intensity of the economy.

The context for Indian Sovereign Green Bonds

• In keeping with the ambition to significantly reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issue of Sovereign Green Bonds.
• The budget is reproduced as below:
  ‘As a part of the government’s overall market borrowings in 2022-23, sovereign Green Bonds will be issued for mobilizing resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.’

What is India’s vision for the achievement of updated NDC2?

• India’s updated NDC will be implemented over the period 2021-2030 through programs and schemes of relevant Ministries/departments and with due support from States and Union Territories.
• As a result of various measures, India has progressively continued decoupling of economic growth from greenhouse gas emissions.
• The Net Zero target by 2030 by Indian Railways alone will lead to a reduction of emissions by 60 million tonnes annually.
• Similarly, India’s massive LED bulb campaign is reducing emissions by 40 million tonnes annually.
• India’s climate actions have so far been largely financed from domestic resources and it is now targeting generation of additional global financial resources as well as transfer of technology as committed under UNFCCC and the Paris Agreement.

What are the features of Sovereign Green Bonds?

• The issuance of Sovereign Green Bonds will help Government of India (GoI) in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy.
• This Green Bond Framework (Framework) sets forth the obligations of the Government of India as a Green Bond issuer.
• The Framework applies to all sovereign Green Bonds issued by the Government of India.
• Payments of principal and interest on the issuances under this Framework are not conditional on the performance of the eligible projects.
• Investors in bonds issued under this Framework do not bear any project related risks.
• Department of Economic Affairs, Ministry of Finance reserves the right to modify this Framework according to international best practices or in accordance with the Government of India’s international commitments and environmental priorities.
• Changes to the Framework will be reviewed by an independent provider.

4 components of the Sovereign Green Bond Framework

• The Sovereign Green Bond Framework is designed to comply with four components and key recommendations of the International Capital Market Association (ICMA) Green Bond Principles (2021).
• These principles recommend delineation of a clear process and disclosure by the issuer to enable the investors and banks and others to understand the characteristics of the green bond.
• The four core components as outlined by ICMA green bond principles are: i. Use of proceeds; ii. Project evaluation and selection; iii. Management of proceeds; and iv. Reporting.

Which projects are excluded from the Sovereign Green Bond Framework?

• Projects involving new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based
• Nuclear power generation
• Direct waste incineration
• Alcohol, weapons, tobacco, gaming, or palm oil industries
• Renewable energy projects generating energy from biomass using feedstock originating from protected areas
• Landfill projects
• Hydropower plants larger than 25 MW.

Role of ”Green Finance Working Committee”

• GFWC has been established with clear lines of authority to oversee and validate key decisions on issuance of Sovereign green bonds under the Chairmanship of Chief Economic Adviser, Government of India and members from implementing departments, Ministry of Environment, Forests and Climate Change (MoEFCC), Niti Aayog (India’s premier public policy think-tank), Budget Division of Department of Economic Affairs (DEA) and Infrastructure Finance Secretariat, DEA.
• While GWFC can co-opt additional members depending on the requirement, from time to time, other ministries and sector experts may be consulted to ensure that the selected projects are in line with the intended objectives.
• The committee will select green projects that fall into one or more of the eligible project categories under this Framework on basis of the initial evaluation report by the concerned Ministry/Department submitted to the GFWC, which will then review and approve projects for Green Funding.

Sovereign Green Bonds Framework: FAQs

Q. What are Sovereign Green bonds?

Ans: Sovereign Green bonds are financial instruments that generate proceeds for investment in environmentally sustainable and climate-suitable projects.

Q. In which year the Union FM announced the issue of Sovereign Green Bonds?

Ans: In keeping with the ambition to significantly reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issue of Sovereign Green Bonds.

Q. In which period India’s updated NDC will be implemented?

Ans: India’s updated NDC will be implemented over the period 2021-2030.

Sovereign Green Bonds

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