With nearly 1.4 billion inhabitants, India's impact on global emissions and the broader climate change is profound. India’s CO2 emissions may jump by a staggering 8.2 per cent in 2023. Recognising the urgency, India has set ambitious renewable energy targets to simultaneously support energy access and fight climate change.
However, scaling the required financial resources to meet the ambitious national targets necessitates innovative approaches. The Government of India (GoI) took a monumental step towards this initiative by joining the Sovereign Green Bonds (SGrB) Club in January 2023. This move marked the issuance of bonds worth INR 80 billion (equivalent to USD 1 billion), split evenly between five and ten-year tenors.
The objectives of green bonds are clear:
Will green bonds be successful in making India greener? Read on to explore the power of green bonds and their role in shaping a better future for the nation and the planet.
Green bonds are a financial instrument with a sustainable twist. They are debt securities, similar to traditional bonds, with a unique purpose: to fund environmentally friendly and climate-related projects. These projects can range from renewable energy initiatives, clean transportation, and pollution control to sustainable agriculture and conservation.
As per RBI framework for acceptance of green deposits dated 11 April 2023 and effective 01 June 2023, the funds raised through green deposits should be utilised or invested in projects that contribute as under:
As per the SEBI Circular about green debt securities dated 30th May 2017, debt security will be termed as green if the funds raised are used for any of the following categories:
Further, as per SEBI Regulation dated 02 February 2023, green bonds are categorised into the following two sub-categories:
The introduction of India's SGrB marks the initiation of the nation's approach to funding its efforts towards achieving decarbonisation goals.
Let us take an example of a green bond invested in a solar farm. To ensure structure and security, the solar farm is moved to a distinct entity known as a special purpose entity (SPE) or special purpose vehicle (SPV). Think of it as placing the solar farm inside a designated container that holds only this asset – nothing else.
When it is time to reimburse the individuals who invested in these bonds, the funds come directly from the earnings generated by the solar farm. Thus, the success of these bonds hinges on the solar farm's financial performance.
The potential impact of green bonds on India's environment is significant. Here's how they contribute to a greener nation:
1. Financing Sustainable Projects
Green bonds channel funds into projects that contribute directly to India's sustainability goals, such as renewable energy, waste management, and clean water supply.
2. Research And Development
Green bonds are instrumental in driving India's energy transition by directing funds towards the research and development of innovative technologies like tidal energy. This strategic allocation gains particular significance as coal currently constitutes more than 50% of the country's energy consumption.
3. Government Support
The Government offers tax benefits to people who buy green bonds. According to Section 80 CCF of the Income Tax Act, if you invest in certain long-term bonds that help the environment, you can get a tax deduction of up to INR 20,000.
Such regulatory incentives from governmental bodies will encourage more individuals and companies to invest in a greener India.
4. Creating Awareness
Green bonds raise awareness about environmental issues among investors and the public. This ripple effect can lead to a more conscious and eco-friendly society.
Earlier, only Indian residents were allowed to invest in green bonds. However, the Reserve Bank of India (RBI), through a circular (RBI/2023-24/81), has allowed non-resident Indians (NRIs) to invest in the government’s SGrBs issued for 2023-24.
The government plans to borrow INR 20,000 cr through green bonds in the current financial year, opening new avenues for retail investors, both domestic and international, seeking sustainable alternative investment options.
Currently, green bonds, which fall under the category of niche investment options, are being invested by advocates of the environment and climate change. To become mainstream, they must offer higher interest rates than the traditional fixed deposits. Additional green tax benefits should attract mass investors to invest in green bonds.
Green bonds catalyse positive change in the journey towards a more environmentally conscious India. India's considerable population and corresponding impact on the global climate highlights the urgency of adopting sustainable practices. As the nation aspires towards ambitious renewable energy objectives, the innovative approach of green bonds offers a way for securing the requisite financial backing.
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