The Reserve Bank of India (RBI) green lighted investments in the country’s Sovereign Green Bonds by Foreign Institutional Investors (FIIS)
Key Points
- Allowing FIIs to invest in India’s green projects widens the pool of capital available to fund the country’s ambitious 2070 net zero goals
- The goal is to ensure 50% of India’s energy comes from non-fossil fuel based sources and to reduce the carbon intensity of the nation’s economy by 45%, as pledged by Prime Minister Narendra Modi at COP26 in Glasgow 2021.
- The RBI had issued Green Bonds worth ₹16,000 crore in two tranches in January and February last year with maturities in 2028 and 2033.
- While in both instances the bonds were oversubscribed, the main participants were domestic financial institutions and banks, narrowing the avenues from where the government could borrow.
What Are Green Bonds?
- Green bonds are government or company-issued borrowings and securities that are floated to fund and finance government debt.
- Just like any other debt instrument and conventional fixed-income security that it is bought by investors who provide the principal that the issuer requires and receive interest upon the maturity of the bonds.
- The way that green bonds differ from more conventional securities is in the way that the issuer pledges to use the amount raised purely towards financing projects that have a net positive contribution to the environment.
- The projects can include renewable energy, clean transportation and green buildings, among others.
- For the green bonds that are going to be issued by the Indian government, the proceeds will go towards projects in the public sector with an aim of reducing the carbon intensity of the economy. The Indian economy is the third biggest carbon emitter in the world.
Key Features of Green Bonds
- Green Bonds typically offer lower interest rates compared to Government-Securities (G-Secs), reflecting their alignment with sustainable development objectives.
- As they typically yield lower interest rates compared to conventional G-Secs, the difference in interest rates between Green bonds and G-Secs is called a greenium.
- They are classified under the Statutory Liquidity Ratio (SLR), a liquidity rate set by the RBI for financial institutions
- Sovereign green bond proceeds will be deposited into the Consolidated Fund of India and managed by the Ministry of Finance’s Public Debt Management Cell.
- Allocation and utilization of Green Bonds will be audited by the Comptroller and Auditor General (CAG) of India.
Global Significance of Green Bonds
- The international green bond market has seen cumulative issuance worth more than USD 1 trillion since market inception in 2007.
- By the end of 2020, 24 national governments had issued Sovereign Green, Social and Sustainability bonds totalling a cumulative USD 111 billion dollars
- Financing green, environmental projects often involve a significant sum of capital investment.
- Climate change has emerged as a major concern for policymakers. The relation between climate change and financial markets runs in both directions asymmetrically.
- On the one hand, climate change impacts financial markets unfavourably as climate shocks could lead to losses on banks and financial institutions.
- On the other hand, financial markets can address climate change favourably by designing financial products to lower the risks.
- Financial markets serve the real economy by channelising finance towards projects that add value to the economy.
- Green bonds can help in achieving this important objective of greening the economy
Challenges Associated With Green Bonds
- The absence of a green taxonomy or standardized method to assess an investment’s environmental credentials poses a challenge.
- Ensuring that funded projects align with the defined criteria and contribute to environmental sustainability requires robust monitoring and evaluation mechanisms.
- Identifying new green projects with credible audit trails and high impact is crucial
- Securing a pipeline of eligible green projects may be challenging, particularly in sectors like offshore wind, grid-scale solar power production, and Electric Vehicles (EVs).
The Role of Foreign Institutional Investors (FIIs) in Green Bonds
- Foreign institutional investors (FIIs)are those institutional investors who invest in assets belonging to a different country other than that where these organizations are based.
- Investors such aspension funds, mutual funds, insurance companies, banks, and other significant financial institutions from abroad are included in Foreign Institutional Investors (FIIs).
- FIIs are crucial to a country’s financial markets as they enhance liquidity, boost trading volumes, and affect stock prices.
- These investors deploy their capital into various financial instruments like stocks, bonds, and derivatives
- The capital influx from FIIs can positively or negatively impact the local economy, influenced by factors including market dynamics, governmental policies, and worldwide economic conditions.
- FIIs in India are governed by the Securities and Exchange Board of India (SEBI), and the Reserve Bank of India (RBI). They also set the investment limits for them
Conclusion
India’s initiative to allow Foreign Institutional Investors (FIIs) to invest in sovereign green bonds is a significant step toward financing green and sustainable projects. These bonds help channel funds into renewable energy, clean transportation, and other environmentally friendly projects. However, challenges remain, including the need for a standardized green taxonomy and robust project monitoring. With increased participation from FIIs, the growth of green bonds in India could pave the way for achieving the country’s ambitious environmental and economic goals.
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