The success of the maiden sovereign green bond (SGrB) auction of the Centre signals a healthy appetite for these instruments from investors. Finance Minister Nirmala Sitharaman can probably consider doubling the borrowing from this channel from ₹16,000 crore targeted for this fiscal year. While the Reserve Bank of India (RBI) planned to auction ₹4,000 crore of SGrBs with five-year maturity and another ₹4,000 crore of similar bonds with 10-year maturity last week, the auction witnessed bids worth for more than four times the offer, at ₹32,892 crore.
This enthusiastic response is despite the five-year bonds being priced around five basis points lower than regular government bonds of similar maturity and 10-year green bonds being priced around 10 basis points lower. Willingness on part of investors to accept a ‘greenium’ (lower interest rates on bonds targeting green energy) shows that investors are ready for these instruments.
SGrBs differ from other government bonds in the manner of fund utilisation. Funds raised from SGrBs have to be earmarked for public sector projects which reduce carbon intensity in the economy. Given the commitments made at COP26 including ensuring 500GW of power production from renewable energy by 2030, reduction of carbon intensity of the economy by 45 per cent from 2005 levels by 2030, and net zero emission by 2070, the country needs enormous funds for setting up clean energy infrastructure. The SGrBs will help ring-fence funds for these areas, helping expedite these projects. Besides helping achieve climate control goals, SGrBs help investors meet their ESG (environment, social and governance) mandates too. Though many funds have been set up with this investment criteria over the last five years, there aren’t enough instruments targeting these goals. Not only do SGrBs meet the criteria, they are also very secure as the principal as well as the interest payment is guaranteed by the central government. Many investment funds would be glad to lock in to these investments for the long term, despite the lower interest rates. The next auction for ₹8,000 crore of these bonds scheduled for February 9 is also likely to sail through. The Centre can raise funds at a lower cost compared with regular government bonds.
The Centre, however, needs to adhere to the SGrBs framework adopted in November last year to ensure that the credibility of these instruments is retained. This framework is in line with rules for green bonds formulated by the International Capital Market Association green bond principles (2021) and deals with the utilisation of funds raised through this channel, manner in which the projects receiving the money are evaluated and selected, management of the funds raised, the disclosure requirements and reporting. The Centre needs to be ready to withstand scrutiny of both domestic and foreign investors. Obfuscation of fund utilisation will impact the future fund-raising ability through this route.