Knowledge Booster: Green Bonds, Blue Bonds, and Masala Bonds

Key Takeaways:

1. Bond (General Definition):

   • An instrument to borrow money.

   • Issued by a country’s government or a company to raise funds.

   • Government bonds are considered one of the safest investments, offering the lowest returns (yield).

   • Examples of government bonds: G-secs in India, Treasury in the US, and Gilts in the UK.

2. Yield of a Bond:

   • The effective rate of return that a bond earns.

   • Changes with the price of the bond (inversely related).

   • Example: A 10-year G-sec with a face value of Rs 100 and a coupon payment of Rs 5 has a yield of 5%. Buyers pay Rs 100, and the government pays them Rs 5 annually for 10 years, returning the Rs 100 at the end.

3. Sovereign Green Bonds (SGrBs):

   • Issued by sovereign entities (e.g., the Government of India).

   • Proceeds are earmarked for “green projects” (as defined by the issuer’s framework).

   • Green projects

     • Energy efficiency in resource utilization

     • Reduce carbon emissions

     • Promote climate resilience

     • Improve natural ecosystems.

   • In 2022, the Government of India formulated a framework for issuing such bonds.

   • Demand for SGrBs in India has been muted.

4. Blue Bonds:

   • Proposed by SEBI in its paper, ‘Consultation Paper on Green and Blue Bonds as a Mode of Sustainable Finance’.

   • India has significant potential for deploying blue bonds in various aspects of the blue economy.

   • Blue Economy Definitions:

     • World Bank: “Sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystems.”

     • European Commission: “All economic activities related to oceans, seas, and coasts.”

5. Masala Bonds:

   • Rupee-denominated bonds, meaning funds are raised from overseas markets in Indian rupees.

   • Eligible issuers: Any corporate, body corporate, and Indian bank.

6. Social Impact Bonds:

   • Described by the OECD as a “pay-for-success” instrument.

   • Return on investment depends on the outcome of the financed program.

   • Allows for tracking the progress of the outcome, ensuring transparency for investors.

7. Sustainability-Linked Bonds:

   • Defined by the OECD as bonds “for which the financial and/or structural characteristics can vary depending on whether the issuer achieved predefined sustainability or Environmental, social and governance objectives.”

   • A forward-looking, performance-based instrument where issuers commit to future improvements in sustainability outcomes within a determined period.

Beyond the Nugget: Sustainable Development Goals (SDGs)

• The main objective of these bonds is to meet SDG targets.

• India is reportedly on track to meet its SDGs well ahead of the 2030 deadline.

  • Relevant SDGs:

    • Goal 7: Ensure access to affordable, reliable, sustainable, and modern energy for all.

    • Goal 11: Make cities and human settlements inclusive, safe, resilient, and sustainable.

    • Goal 13: Take urgent action to combat climate change and its impacts.

    • Goal 14: Conserve and sustainably use the oceans, seas, and marine resources for sustainable development.

    • Goal 17: Strengthen the means of implementation and revitalize the global partnership for sustainable development.