What are Sovereign Green Bonds (SGrBs)?

About Sovereign Green Bonds (SGrBs)

• A green bond is a debt security that is issued to raise capital to support climate-related or environmental projects, according to the World Bank.
• SGBs are issued by governments to raise resources for such projects.
• The Union Budget 2022-23 announced the issue of SGrBs.
• The framework for the SGrBs was issued by the government on November 9, 2022.
• What does the framework entail?
  • The government’s framework is based on the International Capital Market Association’s (ICMA) listed principles for issuing green bonds, which has four components:
• Use of proceeds, project evaluation and selection, management of proceeds, and reporting.
• The government said the bonds’ proceeds will be used for green projects that:
  • Encourage energy efficiency
  • Reduce carbon emissions and greenhouse gases
  • Promote climate resilience and/or adaptation
  • Improve natural ecosystems and biodiversity, especially in accordance with the principles of sustainable development goals
• The framework listed investments in solar, wind, biomass, and hydro energy projects, and urban mass transportation projects such as metro rail, green buildings, pollution prevention and control projects. 
• The government excluded projectssuch as fossil fuels, nuclear power generation, and direct waste incineration.
• The eligible expenditure is limited to government spendingthat occurrednot more than 12 months prior to issuance.
• The proceeds should be allocated to projects within 24 monthsof issuing the bonds.
• If an eligible green project is postponed or cancelled, it will be replaced by another eligible green project.
• How will green projects be evaluated and reported?
  • The Ministry of Finance has constituted a Green Finance Working Committee composed of relevant ministries and chaired by the chief economic adviser.
  • The ministries will submit their projects to the committee, which will meet at least twice a year to evaluate the proposals.
  • Once the projects are evaluated, the final list will be given to the budget division of the finance ministry.
  • The division will then issue the bondsthrough the RBI and use the proceeds to finance the selected projects.
  • The government will release an annual report on the selection of green projects, the funds deployed, and their impact on the greening of the economy.
  • It will also maintain a Green Register with details of the green bond issuance, the proceeds generated, allocations made, and information about the eligible projects.
• Apart from green bonds, the government will finance green projects from its tax receipts as well.
• How will green bonds be issued?
  • The government will inform the RBI about the amount of eligible green expenditure and the funding required from green bonds.
  • The bonds will be issued in maturities of five and ten years and can be traded like other government bonds.

Q1: What is a Bond?

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental) for a set period of time in return for regular interest payments. The time from when the bond is issued to when the borrower has agreed to pay the loan back is called its ‘term to maturity’. The bond issuer uses the money raised from bonds to undertake various activities, such as funding expansion projects, refinancing existing debt, undertaking welfare activities, etc.

Source: Why has India allowed FIIs to invest in its green bonds? | Explained