The government departments that seek the proceeds from sovereign green bonds will have the primary responsibility of ensuring that the money is utilised for the purpose it is raised, a senior official told FE, as the use of such funds is a critical focus area for investors. The central bank will soon announce the time line and the tenure of such bonds, and other operational details, after discussions with investors, he added.

Analysts told FE that in the absence of tax incentives and more attractive yields than the usual government securities, domestic investors–who are currently under no regulatory compulsion to invest in green bonds–may not exhibit much enthusiasm for the maiden issuance of sovereign green bonds. The yields on these bonds are expected to be lower than the other comparable government securities.

Also Read: Sovereign green bond framework excludes large hydro projects

However, if large international investors with ESG focus, including pension funds, are allowed in primary auctions, the government can easily mop up the targeted Rs 16,000 crore via this route in the second half of this fiscal, some of them said.

Even without the global investors, the government will still be able to raise the desired amount by nudging domestic state-run banks or insurance companies to subscribe to them, given the modest size of the issuance.

Madan Sabnavis, chief economist at Bank of Baroda, said: “If the sovereign green bonds have a lower yield and carry no benefit in the form of taxes or on the mark-to-market basis (for banks), there will be less incentive to hold on to them in the present framework. This will hold for all institutional or retail investors who would be looking for a higher return or tax benefit.”

Regulatory push requiredAnalysts suggested regulatory push that would encourage investors to put in their money in such bonds. For instance, as pointed out by Soumyajit Niyogi, director at India Ratings & Research, if the RBI makes sustainable finance a part of banks’ priority sector lending requirement, they will have to park funds in such projects. Sebi, too, can also introduce similar guidelines for investors.

Despite the absence of enough incentives now, the issuance of such bonds is crucial for India to develop a credible market for financing green projects, given the increasingly critical role sustainability is going to play in shaping the development needs of countries across the globe, said the analysts.

Anil Gupta, group head (financial sector ratings) at ICRA, said: “When we are talking about COP-27 and if tomorrow developed countries decide to make finance available for green purposes at a lower cost, at least we should have some instruments to issue to them. Moreover, unless the government issues such bonds, how will it gauge the appetite of both domestic and global investors for such papers?”

Importantly, once the yields on sovereign green bonds are established, it will likely influence the yield movement of such papers with similar tenure floated by private players.