The next big thing on the agenda is Sovereign Green Bonds (SGBs), unveiled as part of this year’s Union Budget announcements. The Reserve Bank of India (RBI) has already started pilot testing a central bank digital currency (CBDC), and an SGB program will be introduced soon, as indicated by the government. The concept of SGB is quite rudimentary. The money raised by the government through these is expected to be 16,000 crore this year, will be deployed for green projects.
Arguably, the same goal can be achieved without calling it ‘sovereign green bonds’ by allocating resources to green projects with equal outlays. These green projects should compulsorily form part of the capital expenditure from the allocations made to various ministries. All one critic might say is that there is a lot of buzz about what could have been a simple transaction.
The interesting part is the pricing and regulatory structures of such bonds that can make them attractive to investors. This is important because if such a bond is to be marketed as a special government security (G-Sec), it would require substantial buyers.
The first question is whether the interest rate to be paid will be higher than the interest rate to be paid on regular G-Secs. It is believed that the yield of an SGB will be low, in which case, there is no reason for banks to hold G-Secs in excess of their statutory liquidity ratio (SLR), opting for low-yielding bonds. Ideally, the interest rate should be higher, as green projects tend to be more expensive.
Also, the government may also have to give some tax concessions. Here too, it is open and it is quite possible that no benefit will be given to them. If so, banks may prefer to skip these auctions. As the RBI is trying to bring retail investors into the G-Sec market, the tax benefits will make even lower yielding bonds attractive. The RBI may have to be kept in the loop to create a more conducive investment framework so that banks get excited. Therefore, bond pricing will be the most important element of the exercise that needs to be worked out.
Another area of interest is the deployment of these funds. As they are to be earmarked for green projects, the relevant ministries like roads, railways, defence, communication etc., have to look at capital expenditure with clear commitments to green processes. But who will supervise these projects? If the money is invested in a solar project, it will be classified as a green venture. But then, the government does not make solar plants. Funds are contracted for construction of roads or construction of railway tracks, coaches etc. This would mean establishing a thorough and credible rating system for projects to qualify as ‘Green’.
At present, we do not have such systems. Construction is considered one of the most anti-green activities, as it usually involves clearing agricultural land to build the structures necessary for economic progress, but affects the environment. Therefore, like the concept of Net-Zero, all such ventures should also have such plans so that they can generate enough pro-environment activities. Intuitively, this is a highly complex exercise.
There are cases of green bonds in India issued by banks, which used the money to fund green projects. Here, it was easy because the final product was classified as green. But when it comes to government spending, it will be a bit more complicated. Therefore, before the launch of green bonds, the Center would need to involve rating agencies like CARE, CRISIL, ICRA, etc., and tell them what would be defined as green. It will outline the rating model prepared by these agencies which is conceptually acceptable to the government.
However, the bigger challenge will be in monitoring the progress of green projects. Typically, costs add up, which can upset the budget math. This can lead to compromise. For example, the railways may only obtain electricity from a renewable source as it is part of the green mandate, but a chance of its replacement with conventional energy may arise at some point in order to stay within budgetary limits.
Therefore, it is necessary that the government works out all these details before issuing green bonds. This would mean that the concept of green projects should be objectively defined, with rating agencies being credited for the credibility of lending. The budgeting puzzle is that money is redeemable; What is picked up from any source can be deployed anywhere. Therefore, what is green may be open to interpretation.
The introduction of SGBs can be viewed from two perspectives. The first is that it will lead to the development of systems for objectively grading or rating projects from an environmental perspective. At present, most companies only pay lip service to ESG in annual reports that talk about the initiatives taken by them. As the rating system evolves, it may directly incorporate project appraisal processes for all credit proposals. This will increase awareness towards promoting a green approach. We have already seen how climate damage has changed almost everything in the world. For example, our monsoon pattern has become distorted, causing damage to crops. Cities like Gurugram and Bengaluru have faced severe waterlogging mainly due to faulty road planning, with the fault ultimately pointing to government officials. Thus environment is also a direct concern for the governments and the launch of SGB will be a big step.
These are the personal views of the author.
Madan Sabnavis Chief Economist, Bank of Baroda and ‘Lockdown or Economic Destruction?’ is the author of.
catch all business News, market news, today’s fresh news events and breaking news Update on Live Mint. download mint news app To get daily market updates.