8 points on how Sovereign Green Bonds will be different from government bonds

The Sovereign Green Bonds ( SGrBs) framework was announced on November 9, 2022, has finally been put into action with the Central government announcing the launch of the bonds in two tranches aiming to raise Rs 16,000 crores within a month. Per the indicative calendar 5-year and 10-year green bonds worth Rs 4,000 crore each will go under the hammer on January 25 and February 9.  

Here are eight points on how SGrBs will work by Col. Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm.

1. Green Bonds are issued for mobilising resources for green infrastructure, which primarily refers to deploying the mobilised funds in public sector projects which help in reducing the carbon intensity of the economy.

2. Being the first time that such Green bonds have been launched in India, these two auctions would give ample indication of the appetite of Indian institutional investors for such environmentally sustainable initiatives by the government. Such bonds have been fairly successful in western developed countries as they have been around for more than 5 years there.

3. The only difference between Green Bonds and other ordinary government-issued bonds is that the funds raised from investors are only used to support initiatives that have a good influence on the environment, such as green construction and renewable energy. Primarily these aim to contribute to the planet and its sustainability.

4. The government has tried to make them attractive for institutional investors by giving sops like issuing them through a uniform price auction, making them eligible for Repo as also SLR purposes, and making them tradeable. Even NRIs are allowed to invest in them.

5. The success of such a plan would depend on the creation of a conducive ecosystem for such securities including foreign investments, where ‘green’ investing is quite a rage. However, the current currency environment may act as a dampener with foreign investors worried about exchange rate risks.

6. As far as the returns on these bonds are considered, Green bonds traditionally are issued globally at higher premiums leading to lower returns. Since they are being issued with a sovereign guarantee, returns could be even lower.

7. The risk is further reduced in these bonds as per the framework announced earlier where the payments of principal and interest on these bonds are not conditional on the performance of the eligible projects and the investors in these bonds do not bear any project-related risks.

8. Though such bonds typically have tax incentives also associated with them, no such information about these bonds have yet come out on these bonds.