Sovereign green bonds to make a comeback in budget

Green bonds address the funding requirements for projects in solar, wind and hydropower sectors. With several financially viable projects in the public sector in the pipeline, policymakers feel that funds raised through this route will be easily utilized.

The Union budget for FY24 did not mention sovereign green bonds. However, the government later included a phased ₹20,000 crore green bond plan for the second half of the borrowing calendar. Of this, bonds of ₹ 5,000 crore with a tenure of five years were sold in November 2023, and ₹10,000 crore worth of bonds with a tenure of 30 years in two tranches of ₹5,000 crore each are expected across January and February 2024; bonds worth another ₹5,000 crore are expected by March.

A spokesperson for the finance ministry did not respond to emailed queries.

Despite global challenges, Indian investors seem to have an appetite for sovereign green bonds. “Sovereign green bonds (in India) are getting fully subscribed," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

“The challenge is getting greenium over normal corresponding maturity government bonds. To date, greenium has been only of a few basis points," he said. “However, this is a phenomenon across world markets. All treasury markets are facing the issue of not getting expected greenium," he added. Greenium, or green premium, refers to pricing benefits based on the logic that investors are willing to pay extra or accept lower yields in exchange for sustainable impact.

The Union budget for FY25 may keep government borrowing at ₹15-16 trillion, about the same level as the ₹15.43 trillion in FY24, the person cited earlier said on condition of anonymity. However, unlike last time, green bonds will find specific mention so that if need be, additional green bonds beyond the targeted amount may be planned in the second half of the borrowing programme.

In September, JPMorgan said it will include Indian government bonds in its widely tracked emerging market debt index. While this inclusion may prompt billions of dollars of inflows into the world’s fifth-largest economy, India’s local bonds will be included in the Government Bond Index-Emerging Markets index and the index suite, benchmarked by about $236 billion in global funds. The index provider will add the securities starting 28 June, and India will have a maximum weight of 10% on the index.

“The pace of green bonds could increase next fiscal as we expect FPI (foreign portfolio investor) participation to increase due to the inclusion (of sovereign bonds) in the JPMorgan index," added Srinivasan.

The Union budget for FY23 first proposed sovereign green bonds with a target of ₹ 16,000 crore. The first tranche of ₹8,000 crore was sold on 25 January 2023 and the second on 9 February 2023.

Currently, the sustainability-linked bond market is navigating a slowdown amid rising interest rates globally. The weakness marks a shift from past years when governments and companies raised funds for green initiatives at attractive rates.

For green bonds to support borrowing plans, they should cost less than other bonds, especially considering their ecofriendly label, a senior finance ministry official had earlier told Mint. The official said that if conventional bonds yield 7-7.2%, green bonds should be at a discount and shouldn’t have over 6.8% yield for it to be feasible.

The yield on the Indian 10-year government bond was trading at 7.178% on 12 January. The yield had jumped in the past months as central banks across the world tightened monetary policy, impacting demand for emerging market bonds.

The funds raised by selling green bonds can’t be utilized for projects related to fossil fuel extraction, production or distribution, or nuclear power. However, they can be used for government investments, subsidies, grants-in-aid, tax foregone or operational expenses to support climate mitigation and sustainable green initiatives to reduce carbon intensity.