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Central Government Unveils Sovereign Green Bond Framework

A Green Finance Working Committee has also been constituted to validate key decisions on issuance of sovereign green bonds.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

The central government unveiled the Sovereign Green Bond Framework on Wednesday, which will outline the procedures and obligations of the government as a green bond issuer.

A Green Finance Working Committee has also been constituted to validate key decisions on issuance of the bonds.

Green bonds are financial instruments that generate proceeds for investment in environmentally sustainable and climate-suitable projects. Such bonds would command a relatively lower cost of capital vis-à-vis regular bonds and necessitate credibility and commitments associated with the process of raising bonds, the Finance Ministry said in a statement.

The government is expected to use the proceeds from sovereign green bonds to finance and/or refinance expenditure for eligible green projects falling under the framework's ‘Eligible Categories’.

A document released by the Department of Economic Affairs on Wednesday highlighted that projects falling under the category would be public sector projects, which would curb the carbon intensity of the economy and help fulfill the country's sustainable development goals.

The categories identified by the framework include:

  • Renewable energy.

  • Energy efficiency.

  • Clean transportation.

  • Climate change adaptation.

  • Sustainable water and waste management.

  • Pollution prevention and control.

  • Green buildings.

  • Sustainable management of living natural resources and land use.

  • Terrestrial and aquatic biodiversity conservation.

Of its Rs 5.92 lakh crore borrowing plan during the second half (October-March period) of this fiscal, Rs 16,000 crore was earmarked to be raised from issuance of green bonds.

The government's total borrowing plan this fiscal stands at Rs 14.21 lakh crore, as opposed to the initially budgeted Rs 14.31 lakh crore, given the favourable tax collections.

How Will It Work?

For the purpose of project evaluation and selection, the Ministry of Finance has constituted a Green Finance Working Committee.

It will have representation from relevant line ministries and will be chaired by the Chief Economic Adviser, Government of India—a post currently served by Professor Anantha Nageswaran.

The GFWC is expected to meet at least twice a year, post the initial evaluation of the project by the concerned ministry/department in consultation with experts.

Here's how it will work:

Step 1: Relevant line ministries will conduct an internal evaluation to come up with a list of eligible projects along with their level of preparedness and submit this to the GFWC.

Step 2: The GFWC will evaluate the entire list of submitted projects for their adherence to the framework, and their alignment with green objectives.

Step 3: Eligible projects would be finalised, the Public Debt Management Cell of the Budget Division (DEA) will issue bonds, manage and allocate proceeds.

What Constitutes 'Green Expenditure'?

The framework highlighted that all eligible "green expenditures" will include public expenditure undertaken by the government in the form of investment, subsidies, grant-in-aids, or tax foregone (or a combination of all or some of these) or select operational expenditures, and R&D expenditures in public sector projects.

"Eligible expenditures are limited to government expenditures that occurred maximum 12 months prior to issuance. It will be endeavoured that all the proceeds get allocated to projects within 24 months following issuance," the ministry said.

The devolution of funds is expected to be in tranches, contingent on the achievement of the physical targets in the approved project document.

Exclusion Criteria

The government has also outlined an exclusion criteria which includes the following:

  • New or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based will be excluded.

  • Nuclear power generation.

  • Direct waste incineration.

  • Alcohol, weapons, tobacco, gaming, or palm oil industries.

  • Renewable energy projects generating energy from biomass using feedstock originating from protected areas.

  • Landfill projects.

  • Hydropower plants larger than 25 MW.

  • Expenditures directly related to fossil fuel.

Investments/expenditures aimed at cleaner Compressed Natural Gas is allowed, only when used in public transportation projects.

The document also notified that any subsidy/incentive for private transportation using CNG is neither envisaged nor included.

The framework has been evaluated by CICERO, an independent second party opinion, the ministry informed.

India’s green bonds framework received a "Medium Green" with a “Good” governance score in line with ICMA’s Green Bond Principles and international best practices.