Tax incentives unlikely for sovereign green bonds

The Center is unlikely to offer tax incentives for the issuance of its first green bonds in the second half of the current fiscal year, as it believes that investor interest in them stems from green pledges from ‘enterprises and funds, rather than profit motives.

Rupee-denominated bonds, through which the government plans to raise Rs 20,000 crore-Rs 25,000 crore, will carry a slightly lower coupon rate than comparable government securities (G-secs).

The yield on 10-year G-secs is now around 7.2%.

“We are confident that companies and funds that want to invest in green technologies and businesses for their ESG (environmental, social and governance) objectives will rise to the challenge,” an official said, adding that higher interest rates and tax incentives would negate the purpose of this bond issue to raise low-cost funds for long-term climate finance.

Despite lower returns, many investors are setting aside funds to invest in green projects as part of their ESG obligations. As corporate sustainability disclosures increase, this information could be used by banks, credit rating agencies and other financial institutions, along with financial information to assess the credibility of a company.

“As part of the government’s global market borrowings in 2022-23, sovereign green bonds will be issued to mobilize resources for green infrastructure. The proceeds will be deployed in public sector projects that help reduce the carbon intensity of the economy,” Finance Minister Nirmala Sitharaman said in her budget speech earlier this year.

On the annual borrowing plan of Rs 14.31 trillion in FY23, the Center was to borrow Rs 8.45 trillion from the market through dated securities in the first half of FY23 and the rest in the second half. The second half borrowing schedule is expected to be announced at the end of September and green bonds will be part of it.

At the 26th session of the Conference of the Parties to the UNFCCC in Glasgow in November 2021, Prime Minister Narendra Modi declared that India would achieve net zero emissions by 2070, which means that its emissions from greenhouse gases will be less than the total removal and absorption of emissions.

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According to the CEEW Center for Energy Finance, India would need cumulative investments of $10.1 trillion to achieve net zero emissions by 2070. Of this amount, $8.4 trillion would be needed to significantly increase the production from renewable energies and the associated integration, distribution and transmission infrastructures. An additional $1.5 trillion needs to be invested in the industrial sector to build green hydrogen production capacity to advance the decarbonization of the sector.

Recently, Reserve Bank of India (RBI) Governor Shaktikanta Das said that the central bank and the government are working on a framework to issue sovereign green bonds that meet global standards.

Given the nascent green bond market in India, issuing sovereign green bonds is likely to be a benchmark for companies that are also raising ESG funds for their green projects.

“The results of the sovereign green bond auctions are likely to serve as a benchmark for future issuances by private sector entities in the domestic green bond market,” said Anil Gupta, Vice President of Icra.

Globally, investors follow the Sustainable Development Goals (SDGs) suggested by the United Nations to gauge the right kind of return on their investments.

Green bonds are aimed at institutional investors, including mutual funds that have a mandate to invest in sustainable projects and companies around the world.

According to the standards of the Securities and Exchange Board of India (Sebi), 1,000 of the major listed companies are required to prepare the “annual publication of the corporate responsibility report”, covering their activities related to the environment and relations with stakeholders. These companies will not necessarily invest in bonds, as they have their own green projects and also raise funds through private green bonds.

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