Sovereign green bonds are debt instruments issued by any sovereign entity, inter-governmental groups, or alliances in which the proceedings of the bonds are utilized for projects classified as environmentally sustainable. The projects can include renewable energy, clean transportation, and green buildings, among others.
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Green bonds are also issued by many corporations and the international green bond market has seen cumulative issuance worth more than $ 1 trillion since its market inception in 2007. Sovereign green bonds are similar to vanilla government bonds, but with a particular ‘green’ purpose given to the use of the proceeds of the bond. Pricing of the bond from investors is not reliant on the underlying return on investment of the projects, but rather on the sovereign risk/rating. Sovereign green (and non-sovereign green) bonds typically price on or very near the yield curve of vanilla bonds.
Sovereign green bonds have been issued with an average tenor of 14 years—the longest being 40 years issued by the Chilean government in 2021—drawing long-term investors like pension funds, insurers, and those with a focus on environmental, social, and governance (ESG) issues.
Sovereign Green Bonds Issued By countries as of 31st December 2020 –
| Country | US $ (Billion) |
| France | 30.70 |
| Germany | 13.60 |
| Netherlands | 10.00 |
| Belgium | 8.20 |
| Chile | 6.20 |
| Ireland | 5.70 |
| Poland | 4.30 |
| Indonesia | 3.10 |
| Sweden | 2.30 |
| Hungary | 1.90 |
| Hong kong | 1.00 |
| Egypt | 0.80 |
| Lithuania | 0.10 |
| Nigeria | 0.10 |
| Fiji | 0.05 |
| Seychelles | 0.02 |
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Why Sovereign Green Bonds are becoming popular?
- Governments worldwide recognize the negative economic consequences of climate change.
- Global green initiatives such as the Paris Agreement and the United Nations Sustainable Development Goals have encouraged governments to fund green projects consistent with their international commitments.
- Investors and corporations are becoming more aware of the effects of climate change and global warming hence investments in green bonds have become very popular, seeing this many poor and developing countries that lack deep capital markets and a strong domestic institutional investor base, are increasingly issuing green bonds in offshore markets to diversify their investor base.
Objectives of Green bonds issue:
At COP15 in Copenhagen in 2009, nations agreed that to “stabilize greenhouse gas concentration in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system,” we must reduce global emissions to hold the increase in global average temperature below 2 degrees Celsius (2°C) above pre-industrial levels and co-operate in achieving the peaking of global and national emissions as soon as possible hence in order to shift to low-carbon and climate-resilient investments Green bonds were issued by various corporations and governments.
At the United Nations Climate Change (UNFCC) conference – held in Paris in 2015 global economies committed to moving towards a low-carbon future. For instance, India pledged to reduce its greenhouse gas (GHG) emissions per unit of gross domestic product (GDP) by 33-35% (of 2005 levels) by 2030.
Sovereign Bond issue by India:
Finance Minister in the Budget 2022 announced that the government proposes to issue at least 240 billion rupees ($3.3 billion) in sovereign green bonds to mobilize resources for green infrastructure and this announcement is in sync with India’s commitment to achieving net-zero carbon emissions by 2070 as announced by our Prime Minister Narendra Modi, at the climate change conference in Glasgow, Scotland. The debut sale may take place in the first half of the fiscal year that starts on April 1, and a decision to sell more green debt will depend on the response to the initial issuance, the proceeds from the issue of these sovereign green bonds will be deployed in public sector projects which help in reducing the carbon intensity of the economy, such as electric vehicles, mass rapid transport systems, and renewable energy as per the finance minister. The yields are expected to be lower on green bonds to attract more foreign investors.
The budget has also included several measures on climate action such as the battery swapping policy and the additional allocation of Rs. 19,500 Cr under the PLI scheme for manufacturing high-efficiency solar modules. The government is introducing a new bill that aims to provide a regulatory framework for Carbon Trading in India to Encourage penetration of renewables in the energy mix.
Future prospect:
Globally – Since the first issuance in December 2016, 27 countries have issued sovereign green bonds for climate change-related projects and mobilized cumulative capital of $194 billion. France is the largest sovereign issuer to date, raising a total capital of US$51 billion, followed by Germany at $27 billion and the United Kingdom at $21.6 billion and this is expected to grow more as these bonds were oversubscribed by 8-12 times—a sign of huge investor demand.
In India, Green bonds are fairly new and have garnered a substantial amount of traction in the past decade, with issuers like Yes Bank and Axis Bank raising debt for renewable energy, water management, and low-carbon building projects. As green bonds are issued for projects ear-marked as ‘green’, they have the potential to attract a larger pool of investors globally given the rapid integration of environmental, social, and governance (ESG) metrics in the process of investment analysis.
Apart from being a good alternative to conventional bank debt, green bonds are also an effective tool in driving down the cost of capital and reducing asset-liability mismatches. The development and growth of a green bonds market in the country may see the entry of new participants such as debt aggregators who pool loans from banks or developers. Since India’s green bond market is roughly less than a tenth the size of China’s, it indicates a lot of untapped potentials.
Conclusion:
Looking globally with investors becoming more aware of climate change, investments in greens bonds have become extremely popular and this is expected to grow further as many countries move towards carbon neutrality. In India, green sovereign bond issuance can serve as role models for other types of issuers and contribute to the development of the green finance market, It can also bring in additional collateral benefits such as enhanced collaboration with different stakeholder groups and additional transparency in public spending for investors and citizens.
Green bonds basically provide a way to help environmental causes through investing and since buying a green bond might be too expensive for retail investors we would recommend investors who are interested in such instrument to invest in green mutual funds which are available for lower ticket size. Income from green bonds are also tax exempt.
Disclaimer:
This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit mymoneysage.in
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