What are the advantages and challenges associated with the introduction of Sovereign Green Bonds?

Recently, the Union Minister for Finance & Corporate Affairs has approved the final Sovereign Green Bonds Framework of India. Sovereign Green Bonds will be issued for mobilizing resources for green projects.

Advantages:

• The Framework follows in the footsteps of India’s pledges under “Panchamrit,” as articulated by the Prime Minister at COP 26 in Glasgow in November 2021. 
• India’s dedication to the goals set forth in its Nationally Determined Contributions (NDCs), which were established in accordance with the Paris Agreement, will be further strengthened. 
• The Green Finance Working Committee (GFWC) was formed to validate critical decisions regarding the issuance of Sovereign Green Bonds.
• The money raised from the sale of these bonds will be used for public projects that lower the economy’s carbon intensity.
• The development of a sovereign green benchmark could eventually lead to the establishment of a thriving ecosystem for raising green bonds from international investors.

Challenges:

• Capital is fleeing emerging bond markets as a result of the present international scenario, which is exacerbated by the US Federal Reserve’s quick hike in interest rates and growing US treasury yields. 
• Concerns about the stronger dollar have restricted fresh bond issuance in offshore markets. 
• The SGBs that the Indian government’s plan to issue are anticipated to be issued in the domestic markets and to be denominated in rupees. Therefore, getting a favourable premium is probably going to be challenging.

Way forward:

While this will bring India closer to its goals under the worldwide climate action initiative, economic sustainability will also be a determining element in the exercise’s success.