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Context: The Pension Fund Regulatory and Development Authority (PFRDA) is exploring the possibility of allowing pension funds to invest in sovereign green bonds (SGBs), which are issued by the government to finance projects that have environmental benefits.

Details

• PFRDA Chairman recently said that the regulator is in favour of pension funds investing in SGBs, as they offer a secure and long-term investment option with positive social impact. He said that the regulator is awaiting the guidelines from the government on the issuance of SGBs in the second half of the current fiscal year.
  • The concept of green bonds emerged as a financing instrument to support environmentally friendly projects and initiatives.
  • Sovereign green bonds (SGBs) are issued by governments to raise funds for projects that have a positive impact on the environment, such as renewable energy, clean transportation, sustainable infrastructure, and conservation efforts.
• Pension funds are among the major institutional investors in the Indian debt market, and have a significant role in mobilising long-term savings for productive purposes. 10 pension fund managers manage funds under the National Pension System (NPS), which is a voluntary, defined contribution scheme for employees of central and state governments, corporates and unorganised sectors.

Significance

• Promoting Sustainable Projects: By allowing pension funds to invest in SGBs, there is a direct channelling of funds into environmentally beneficial projects, contributing to the country's sustainable development goals.
• Greening Pension Portfolios: Allowing pension funds to include SGBs diversifies their investment portfolios and aligns with the growing demand for socially responsible investments.
• Government's Environmental Commitment: Issuing SGBs reflects the government's commitment to addressing environmental challenges and promoting a greener economy.

Challenges

• Limited SGB Supply: The availability of SGBs might be limited as governments issue them selectively and based on specific environmental projects.
• Pricing and Returns: The pricing and returns of SGBs might differ from conventional bonds, affecting the risk-reward profile for pension funds.
• Regulatory Framework: Pension funds' investment guidelines and regulatory restrictions might need adaptation to accommodate investments in SGBs.

Way Forward

• Engaging Stakeholders: PFRDA needs to engage with pension funds, government authorities, and other stakeholders to develop a comprehensive framework for investing in SGBs.
• Market Awareness: Awareness campaigns and capacity-building efforts can help educate pension fund managers and investors about the potential benefits and risks of SGBs.
• Regulatory Changes: PFRDA could consider revising investment guidelines and relaxing restrictions to encourage pension funds to invest in SGBs.
• Collaboration with Governments: Collaborating with governments to increase the issuance of SGBs can enhance investment opportunities for pension funds.
• Measuring Impact: Developing mechanisms to assess the environmental impact of SGB-funded projects will boost investor confidence and transparency.

Conclusion

• By exploring the possibility of pension funds investing in SGBs, PFRDA can play a significant role in promoting sustainable investments and supporting projects with environmental benefits, contributing to a greener and more sustainable future.

Must-Read Articles:

Sovereign Green Bond: https://www.iasgyan.in/daily-current-affairs/sovereign-green-bond-framework

GREEN BONDS: https://www.iasgyan.in/daily-current-affairs/green-bonds-1

Pension Fund Regulatory and Development Authority: https://www.iasgyan.in/daily-current-affairs/pension-fund-regulatory-and-development-authority-17

OLD PENSION SCHEME VS NEW PENSION SCHEME: https://www.iasgyan.in/daily-current-affairs/old-pension-scheme-vs-new-pension-scheme

PRACTICE QUESTION Q. What are green bonds, and what features distinguish them from conventional bonds? Discuss their significance, and challenges, and suggest a way forward for promoting their adoption in the financial markets.

https://indianexpress.com/article/insurance/pfrda-keen-on-pension-funds-investing-in-sovereign-green-bonds-on-october-march-fy24-8847213/