The Reserve Bank of India (RBI) has taken a significant stride towards fostering sustainable investment by permitting Foreign Institutional Investors (FIIs) to partake in Green Bonds. This landmark decision reflects the RBI’s commitment to promoting environmentally conscious financing mechanisms, aligning with global efforts to combat climate change. By opening avenues for FIIs to invest in Green Bonds, the RBI not only encourages the flow of international capital into eco-friendly projects but also signals India’s dedication to sustainable development. This move not only reinforces India’s position as a responsible global player but also signifies a crucial step towards building a greener, more resilient economy.
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Context:
- The Reserve Bank of India (RBI) has permitted Foreign Institutional Investors (FIIs) to invest in the country’s Sovereign Green Bonds (SGrBs).
- Foreign Institutional Investors (FIIs) encompass institutional investors like insurance companies, pension funds, and nation-states’ sovereign wealth funds.
- In contrast, Foreign Portfolio Investors (FPIs) constitute a broader category, which includes both institutional investors such as FIIs and individual investors.
Sovereign Green Bonds (SGrBs):
- Sovereign Green Bonds (SGrBs) are government debt instruments designed to finance projects aimed at accelerating the transition to a low-carbon economy.
- In the 2022-23 Union Budget, the Indian government introduced SGrBs to fund green projects.
- The Reserve Bank of India (RBI) issued SGrBs worth ₹16,000 crore in two tranches last year, with maturities in 2028 and 2033.
- These bonds qualify as green government securities (G-Secs) for the Statutory Liquidity Ratio (SLR) and Repurchase Transactions (Repo) and are tradable in the secondary market.
- They were oversubscribed mainly by domestic financial institutions and banks. However, there are concerns that SGrBs may limit the government’s borrowing avenues.
- SGrBs yield lower interest than conventional G-Secs, and the amount foregone by banks by investing in them is called a Greenium.
Benefits of Sovereign Green Bonds (SGrBs):
- Widened pool: SGrBs increase the capital available to fund the country’s green ambitions by attracting investment from various sources.
- Diversification by FIIs: Foreign Institutional Investors (FIIs) are keen on diversifying their green investment portfolios, and SGrBs provide them with regulatory-supported opportunities, especially in developed countries.
- Green credentials: FIIs may seek to enhance their green credentials by investing in SGrBs, particularly when similar opportunities are limited in their home markets.
- Addressing greenwashing: India has effectively addressed concerns about greenwashing through the implementation of the Sovereign Green Bonds Framework, enhancing transparency and credibility in green investments.
India’s Sovereign Green Bonds Framework for 2022:
Implementing Agency:
- The Green Finance Working Committee (GFWC), chaired by the Chief Economic Advisor and constituted by the Ministry of Finance, oversees the implementation of the framework.
Eligible Projects:
- The framework covers investment, subsidies, grants-in-aid, or tax foregone related to green projects.
- It also includes select operational expenditures and research and development (R&D) expenditures aimed at reducing the economy’s carbon intensity and advancing progress towards the Sustainable Development Goals (SDGs).
- These expenditures must have occurred within 12 months prior to the issuance of the Sovereign Green Bonds (SGrBs).
Excluded Sectors:
- The framework excludes sectors such as fossil-fuel extraction and related projects
- nuclear power generation
- direct waste incineration
- activities in industries including alcohol
- weapons, tobacco, gaming, and palm oil.
- renewable energy projects generating energy from biomass using feedstock from protected areas
- landfill projects, and hydropower plants larger than 25 MW are also excluded.
Challenges in the implementation of Sovereign Green Bonds (SGrBs) in India:
- High Coupon Rate: The average coupon rate for green bonds issued since 2015 with maturities between 5 to 10 years has generally been higher than corporate government bonds with similar tenure. This leads to higher borrowing costs.
- High Borrowing Cost: High coupon rates contribute to the high borrowing costs associated with SGrBs, exacerbated by asymmetric information where one party possesses greater material knowledge than the other.
- Suggestion: Developing a robust information management system in India could help reduce maturity mismatches and borrowing costs, leading to more efficient resource allocation in the green bond segment.
- Other Challenges:
- Misuse of Funds: There are concerns about whether the projects funded by green bonds genuinely contribute to environmental preservation, as some projects financed may still have adverse environmental impacts.
- Lack of Credit Ratings: The absence of credit ratings or rating guidelines for green projects and bonds adds to the challenges faced in the green bond market.
- Shorter Tenor Period: Green bonds in India typically have shorter tenor periods of around 10 years, whereas green projects often require more extended periods to generate returns. This discrepancy between the tenor of bonds and project returns complicates investment decisions in the green bond market.
Way Forward:
- Harmonisation of Guidelines and Standards: It is essential to align international and domestic guidelines and standards for green bonds to foster a robust market. Consistency in defining green investments is crucial to ensure coherence and facilitate cross-border transactions.
- Capacity Building Efforts: Efforts should be made to enhance the capacity of issuers in emerging markets by providing them with knowledge and guidance on the benefits, processes, and procedures related to green bonds. This would help overcome institutional barriers and encourage more entities to enter the market.
- Strategic Public Sector Investment: Strategic investment by the public sector in green projects can play a significant role in attracting private investment and instilling confidence among investors. Public sector initiatives can serve as catalysts for broader market participation and expansion
Source: (TH)
FAQs
Q: What are Green Bonds?
Green Bonds are financial instruments specifically designed to fund projects with environmental benefits. These projects can include renewable energy infrastructure, energy efficiency improvements, sustainable water management, and more.
Q: Why is RBI Allowing FIIs to Invest in Green Bonds?
RBI’s decision to allow Foreign Institutional Investors (FIIs) to invest in Green Bonds aligns with the global trend towards sustainable investing. By opening this avenue, RBI aims to attract more capital towards environmentally friendly projects in India, fostering sustainable development.
Q: How Will Allowing FIIs to Invest Impact the Green Bond Market?
Allowing FIIs to invest in Green Bonds is expected to significantly increase the liquidity and demand for such bonds in India. This influx of foreign investment can lower borrowing costs for issuers of Green Bonds, making them more attractive and accessible for financing green projects.
Q: What Are the Benefits of Investing in Green Bonds for FIIs?
Investing in Green Bonds provides FIIs with an opportunity to diversify their portfolios while contributing to environmental sustainability. These bonds often offer competitive returns and are seen as a way to mitigate climate-related risks in investment portfolios.
Q: Is There a Regulatory Framework for Green Bonds in India?
Yes, India has established regulatory guidelines for Green Bonds to ensure transparency and credibility. The Securities and Exchange Board of India (SEBI) has issued regulations governing the issuance and listing of Green Bonds, including reporting requirements to verify that the funds raised are used for approved green projects.
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