India’s Sovereign Green Bonds Weak Demand & Path Forward for Green Finance

What’s in Today’s Article?

• Sovereign Green Bonds Latest News
• Green Bonds
• Muted Investor Demand for India's SGrBs
• Impact of Weak SGrB Demand
• Way Forward for India’s Sovereign Green Bonds
• Sovereign Green Bonds FAQs

Sovereign Green Bonds Latest News

• India has issued sovereign green bonds to fund its low-carbon transition, but investor demand remains weak. 
• Despite their role in raising capital for clean energy, these bonds have struggled to secure a significant greenium (lower borrowing costs typically associated with such bonds) leading to funding cuts for key schemes like grid-scale solar. 
• With limited investor interest, India is relying on general revenue to fill the gaps. Enhancing liquidity, improving reporting transparency, and considering sustainability bonds could help boost demand and expand green finance.

Green Bonds

• Sovereign Green Bonds (SGrBs) are issued by sovereign entities like the Government of India, which established a framework for their issuance in 2022. 
• These bonds fund "green projects" that promote energy efficiency, reduce carbon emissions, enhance climate resilience, and support natural ecosystems.

Issuance and Funds Raised

• Since 2022-23, India has issued SGrBs eight times, raising nearly Rs 53,000 crore. 
• Around 50% of the proceeds are allocated annually to manufacturing energy-efficient three-phase electric locomotives under the Ministry of Railways.

2024-25 Revised Allocations to Schemes Eligible under SGrBs

• Electric Locomotive Manufacturing – Rs 12,600 crore
• Metro Projects – Rs 8,000 crore
• Renewable Energy Projects (including National Green Hydrogen Mission) – Rs 4,607 crore
• Afforestation (National Mission for a Green India) – Rs 124 crore

Muted Investor Demand for India's SGrBs

• India's SGrB issues have faced weak investor interest, limiting the government's ability to secure a significant greenium (lower borrowing costs). 
• Despite easing rules for foreign investors, auctions have seen low participation, often requiring primary dealers to absorb unsold bonds.

Limited Greenium and Funding Challenges

• Globally, greeniums reach 7-8 basis points, but in India, they remain at just 2-3 basis points. 
• This makes SGrBs a less attractive funding source, restricting their expansion.

Liquidity Constraints

• Small issue sizes and investors holding bonds until maturity have stifled secondary market trading, reducing their appeal to new buyers.

Lack of Impact-Driven Investment Ecosystem

• India lacks a strong network of social impact funds and responsible investing mandates, which in other markets drive demand for green bonds. 
• This further weakens investor enthusiasm for SGrBs.

Impact of Weak SGrB Demand

• The government’s struggle to raise sufficient funds from SGrBs affects financing for eligible schemes, increasing reliance on general revenue to cover shortfalls.

Revised Funding Estimates

• Initial Requirement (2024-25): Rs 32,061 crore
• Revised Estimate (after higher yield demands): Rs 25,298 crore
• Grid-Scale Solar Allocation Cut: Reduced from Rs 10,000 crore to Rs 1,300 crore

Bridging the Shortfall

• Expected SGrB Proceeds: Rs 21,697 crore
• Amount Covered by General Revenue: Rs 3,600 crore
• These funding challenges highlight the urgent need to boost investor demand for SGrBs to ensure the sustainability of green initiatives.

Way Forward for India’s Sovereign Green Bonds

• Exploring Sustainability Bonds
  • A World Bank report highlights that emerging markets issue more sustainability bonds—which finance both green and social projects—compared to advanced economies that focus solely on green bonds. 
  • Introducing sustainability bonds could boost investor interest and increase proceeds.
• Improving Post-Issuance Reporting
  • Delayed allocation and impact reports reduce investor confidence. 
  • Investors rely on these reports to assess fund utilization and refine their data models. 
  • However, India's 2023-24 allocation report is yet to be published, affecting transparency and trust.
• Leveraging Multilateral Partnerships
  • India’s sovereign rating is not very high, which limits investor confidence. 
  • Partnering with multilateral development banks to support its green bond strategy could enhance credibility and attract more investment.

Sovereign Green Bonds FAQs

Q1. What are green bonds issued by the RBI?

Ans. Green bonds issued by the RBI are debt securities used to finance environmentally sustainable projects like renewable energy and energy efficiency.

Q2. What are the disadvantages of green bonds?

Ans. Disadvantages include low investor demand, limited liquidity, and minimal greenium, which reduces attractiveness for funding green projects.

Q3. Are green bonds tax-free?

Ans. Green bonds are not necessarily tax-free; their tax treatment depends on the specific bond structure and jurisdiction regulations. 

Q4. What is the difference between green bonds and sovereign green bonds?

Ans. Green bonds fund environmental projects, while sovereign green bonds are issued by a government to finance green initiatives at the national level.

Q5. What is the Greenium?

Ans. Greenium refers to the lower borrowing costs (interest rates) associated with green bonds, typically reflecting high investor demand for sustainable investments.

Source: IE | ET | IE