How are green bonds designed to attract investors & finance sustainable projects in India?

Green bonds, also known as climate bonds, have gained significant traction in India in recent years. The government has announced plans to issue green bonds as part of its overall market borrowings for 2022-23, with the proceeds to be used for financing green infrastructure projects. Green bonds are fixed interest-bearing financial instruments that are issued by any sovereign entity, inter-governmental organization, or corporation.

The proceeds from these bonds are used exclusively for environmentally conscious, climate-resilient projects. However, the investors may require clarity on aspects such as interest rates, liquidity, and trading. Green bonds can also be exposed to environmental risks, such as natural disasters or climate-related events that could impact the underlying projects.

These bonds can be issued by sovereign entities, inter-governmental organizations, or corporations, and they help mobilize resources for green infrastructure. It's worth noting that there is no cap on foreign investment in these bonds because they are considered specified securities under the fully accessible route.

The RBI said it would issue green bonds worth Rs 16,000 crore in two tranches of Rs 8,000 crore each. The green bond issuance accounts for 1.1 per cent of the government’s gross market borrowing of Rs 14.21 lakh crore. It auctioned its maiden sovereign green bonds worth ₹8,000 crores in January this year.

Eligible Projects for Green Bonds in India

The government's framework for green bonds is based on the International Capital Market Association's principles for issuing green bonds. These principles include the use of proceeds, project evaluation and selection, management of proceeds, and reporting. Eligible projects for green bonds in India include those that encourage energy efficiency, reduce carbon emissions and greenhouse gases, promote climate resilience and/or adaptation, improve natural ecosystems and biodiversity, and promote sustainable development goals. Examples of eligible projects include investments in solar, wind, biomass, and hydro energy projects and urban mass transportation projects such as metro rail and green buildings.

Green Bonds in the Union Budget for FY23

In the Union Budget for FY23, finance minister Nirmala Sitharaman announced that the government will issue green bonds as a part of its overall market borrowings for 2022-23. The proceeds from these bonds will be deployed in public sector projects that help reduce the economy's carbon intensity.

How Govt Allocates the Proceeds from Green Bonds

The Ministry of Finance has established a Green Finance Working Committee to evaluate proposals submitted by relevant ministries. Once the projects are evaluated, the final list will be given to the budget division of the finance ministry, which will then issue the bonds through the Reserve Bank of India 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.

Green Deposits

The Reserve Bank of India (RBI) recently also announced a framework for accepting green deposits by banks and deposit-taking non-banking finance companies (NBFCs). These green deposits will be denominated in Indian rupees only and must be used for projects in nine sectors identified by the RBI, including renewable energy and green transport.