Sovereign Green Bond

Why in the news?

In Budget 2022, the Finance Minister stated that the government intends to issue sovereign green bonds to raise funds for green infrastructure.

  • The proceeds will be used to fund public-sector projects to reduce the country's economic carbon footprint.
  • The official statement coincides with India's pledge to achieve net-zero carbon emissions by 2070.

What exactly are Green Bonds?

  • Green bonds are issued by corporations, governments, and multilateral organizations to fund projects that seem to have a significant environmental or climate impact while also providing investors with fixed-income payouts.
  • Renewable energy, clean transportation, and green buildings are examples of possible projects.
  • The same proceeds from all these bonds would be used to fund green projects. In contrast to conventional bonds, the proceeds of which could be used for a wide range of purposes at the discretion of the issuer.
  • Since the market's inception in 2007, the international green bond market has seen cumulative issuance worth more than USD 1 trillion.
  • According to the London-based Climate Bonds Initiative, by the end of 2020, 24 national governments would have issued sovereign green, social, and sustainability bonds, bringing the total to USD 111 billion.

What Does a Sovereign Guarantee Mean for Green Bonds?

  • Sovereign green disbursement sends a clear message of intent to governments and regulators in terms of climate action and sustainable development.
  • It will catalyze domestic market growth and give investment firms a bump up.
  • It will provide standard pricing, liquidity, and an opportunity to innovate for local issuers, thereby supporting overall local overall growth.
  • With the IEA's World Energy Outlook 2021 estimates that developing markets will need to spend 70% of the extra USD 4 trillion needed to achieve net-zero emissions, sovereign issuance can help jumpstart this stream of water of capital.

What other climate action initiatives were declared in the budget?

  • Many such climate action initiatives were included in the budget, along with a battery swapping policy.
  • Extra funding under the PLI scheme is available for the production of high-efficiency solar modules.
  • The current regime is rolling out a new bill to have a regulatory regime for carbon trading in India in order to promote the use of renewable energy in the energy mix.

Next Steps:

To address this massive challenge, both mitigation and a focus on its social dimensions are required: To address climate change, unprecedented global cooperation across borders is required. Green bonds are the means of making this connection.

Investment from a developed economy will be required.

The flows from green bonds may be delayed for a while due to the conflict between Ukraine and Russia, but in the long run, we should be moving quickly in reshaping the climate debate and ensuring more funding for climate-friendly initiatives.

Serbia, Nigeria, Egypt, Colombia, Fiji, Indonesia, and Benin are among the developing countries that have issued sovereign green bonds.

The proceeds were directed toward climate mitigation or adaptation undertakings.