Union finance minister Nirmala Sitharaman on Wednesday approved India’s final framework for sovereign green bonds, setting the obligations of the government as a green bond issuer. The approval of the framework will facilitate attracting global and domestic investments in green projects in the country.

The framework will apply to all the sovereign green bonds issued by the government. One of the key tenets of the framework is that investors in the bonds will not bear any project risk and will get results irrespective of the performance of the project.

“Green bonds are financial instruments that generate proceeds for investment in environmentally sustainable and climate-suitable projects. By virtue of their indication towards environmental sustainability, green bonds command a relatively lower cost of capital vis-à-vis regular bonds and necessitates credibility and commitments associated with the process of raising bonds,” the finance ministry said in a release. 

The proceeds generated from issuance of such bonds will be deployed in public sector projects which help in reducing carbon intensity of the economy, it added.

Outlining the key tenets of the green bond issuance, the framework said, “Payments of principal and interest on the issuances under this framework are not conditional on the performance of the eligible projects. Investors in bonds issued under this framework do not bear any project related risks.”

Sovereign green bond proceeds can be used to finance and/or refinance expenditure in parts or whole for eligible green projects4 falling under eligible categories, the framework pointed out.

The ministry of finance pointed out that the approval will further strengthen India’s commitment towards its Nationally Determined Contribution (NDCs) targets, adopted under the Paris Agreement, and help in attracting global and domestic investments in eligible green projects.

The eligible projects are 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 and terrestrial and aquatic biodiversity conservation.

“Expenditures directly related to fossil fuel are excluded. However, investments/expenditures aimed at a relatively cleaner Compressed Natural Gas (CNG) is allowed as an eligible expenditure when used in public transportation projects only,” the framework said.

To identify the projects to be taken up, the ministry of finance has constituted a Green Finance Working Committee (GFWC) with representation from relevant line ministries and chaired by Chief Economic Adviser. “GFWC will meet at least twice a year to support the ministry of finance with selection and evaluation of projects and other relevant work related to the framework,” the framework said.

“For every successive year, GFWC will meet to identify a fresh set of eligible expenditures in line with the framework in consultation with line ministries,” it added.

“Once the finance bill is passed, the ministry of finance will inform the Reserve Bank of India (RBI) regarding the amount of eligible green expenditures for which proceeds from green bonds can be utilized. The Ministry will also keep track of how proceeds from the issuances are allocated and inform RBI about any remaining eligible green expenditures that can be potentially financed in the subsequent year through another issuance,” it said.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.