Green bonds issued by the government are called sovereign green bonds.
Green bonds are issued by environmental groups, corporations or governments.
Green bonds are gaining popularity in the financial sector. In March this year, HDFC Asset Management Company Limited had floated India’s first maturity fund tracking Sovereign Green Bonds (SGrBs). Earlier, the government released its first SGrB. As the term is gaining traction, let’s take a look at what green bonds are and how they work.
What are Green Bonds?
Green bonds are issued by environmental groups, corporations or governments. Green bonds issued by the government are called sovereign green bonds. They are used to raise money for projects that are environmentally sustainable. These include projects related to renewable energy, sustainable water and waste management, pollution control, green mobility and more.
These bonds are generally fixed interest financial instruments. They are also known as climate bonds.
Green bonds often come with tax incentives to generate interest among investors.
The World Bank and the European Investment Bank (EIB) first issued AAA-rated green bonds in 2007. According to the Climate Bonds Initiative, the green bond market reached $1 trillion in issuance in December 2020.
How are green bonds useful?
Green bonds help governments and groups raise large amounts of capital to help them transition to a low-carbon economy. The bonds also allow environmentally conscious investors to be sure that their money is used for projects that are truly sustainable.
If investors park their money in green bonds, they can expect some tax benefits.
Sovereign Green Bonds of India:
Two SGRBs were auctioned by the Reserve Bank of India in January. With a valuation of Rs 4,000 crore each, the tenors of the bonds were five years and ten years, respectively. The proceeds from the bonds, known as New GOI SGrB 2028 and New GOI SGrB 2033, will be used by the government to finance or refinance expenditure on green projects.
SGrBs were oversubscribed at their inception, with strong demand from several market participants, primarily banks.
By 2030, India plans to reduce the carbon emission intensity of its GDP by 45 percent from 2005 levels. It seeks to derive 50 percent of its cumulative electric power installed capacity from energy resources that are not fossil fuel based. In this regard, green bonds can be a useful source for raising funds.
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