Context

• Pension Fund Regulatory and Development Authority (PFRDA) has said that it will allow pension funds to invest in sovereign green bonds (SGrBs).

What are Green Bonds?

• Green bonds are bonds issued by any sovereign entity, inter-governmental groups or alliances and corporates with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable. 
• When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB).

How are the projects for green bonds selected?

• According to the framework for SgrBs issued by the Government of India, a project is classified “green” on the basis of four key principles. 
• These include: 
  • encouraging energy efficiency in resource utilisation, 
  • reducing carbon emissions and greenhouse gases, 
  • promoting climate resilience and/or 
  • improving natural ecosystems and biodiversity, especially in accordance with SDG (Sustainable Development Goals). 

How are they different from conventional government bonds? 

• Government bonds or government securities (G-Secs) are normally categorised into two — Treasury Bills and dated or long-term securities. 
• Treasury Bills have a maturity of less than one year and they do not carry coupon rates. These are issued at a discount, while redeemed at face value. 
• At the same time, dated or long-term securities are issued for a period above 1 year and up to 40 years. These bonds carry coupon rates and are tradable in the securities market. 
• SGrB is one form of dated security. It will have a tenor and interest rate. 
• Money raised through SGrB is part of overall government borrowing.  

Why are these bonds important?

• Over the last few years, Green Bonds have emerged as an important financial instrument to deal with the threats of climate change and related challenges. 
• Climate change threatens communities and economies, and it poses risks for agriculture, food, and water supplies.
• A lot of financing is needed to address these challenges. It’s critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development – and Green Bonds are a way to make that connection.

Where will the proceeds go?

• The government will use the proceeds raised from SGrBs to finance or refinance expenditure (in parts or whole) for various green projects, including in renewable energy, clean transportation, energy efficiency, climate change adaptation, sustainable water and waste management, pollution and prevention control and green buildings. 
• In renewable energy, investments will be made in solar, wind, biomass and hydropower energy projects.

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