Sovereign green bonds: What are they and should you invest in them | Value Research Sovereign green bonds: We look at why the Indian government plans to issue Rs 16,000 crore worth of green bonds by March 2023 and if they should excite you.
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Sovereign green bonds: What are they and should you invest in them

We look at why the Indian government is planning to issue Rs 16,000 crore worth of green bonds by March 2023 and if they should excite you

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Name
Sovereign green bonds

Why are they in the news?
India will mark its entry into the green bond space by the end of this fiscal year (ending March 31, 2023). The government plans to issue Rs 16,000 crore worth of sovereign green bonds by then.

Earlier this month, the Indian government finalised how sovereign green bonds will be issued from the second half of this financial year.

The government announced its plans to roll out these bonds during this year's budget.

How will these bonds work?
Governments around the world issue bonds to fund projects.

But unlike regular bonds, these green bonds will raise money from the market to finance projects that only have environmental or climate benefits. In return, the government will pay interest on the proceedings.

Why does the Indian government want to issue green bonds?
While the government is yet to mention specific projects, the latest framework plans to use the bond money for:

  • Environment-friendly automobile projects
  • Renewable energy industry
  • Water and waste management project (The Ganga restoration campaign might get funding through the issue of green bonds)

There's also a larger reason: by issuing green bonds and developing sustainable projects, India will try to achieve net-zero carbon emissions by 2070.

Are there other countries that have issued green bonds?
More than 25 countries have done so since 2013.

The sovereign green bond market has grown exponentially, from issuing as little over $11 billion in 2013 to about $568 billion in 2021. Cumulatively, the total market has surpassed $1 trillion.

While the Indian government has joined late, our private companies have been pretty active, having already raised $26 billion through corporate green bond issues. The money has been mainly raised to fund renewable energy projects.

Can individual investors put their money in sovereign green bonds?
Since India's green bonds are still a work in progress, it is unclear whether retail investors or mutual fund companies can invest in them.

While there are environmental, social and governance (ESG)-focused mutual funds in India, they are primarily focused on equities.

However, there are reports of foreign portfolio investors eyeing our green bonds since they have a dedicated environmental, social and governance (ESG) framework.

If allowed, should individual investors put their money in sovereign green bonds?
Let's wait and watch. There are two primary reasons why:

  • Globally, green bonds offer lower yields than regular bonds, which means they provide slightly lower returns.

    And with the Indian government reportedly looking to issue green bonds at a slightly lower rate than regular bonds, it doesn't paint a pretty picture. That said, we should read the fine print before coming to a conclusion.
  • We'll also need to see if green bonds provide tax incentives. If so, it might cancel out the impact of receiving slightly lower returns.

    But then again, it's all conjecture at this point, as media reports indicate that the government may not offer any tax concessions in its first issue of green bonds.

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