Pension funds to invest in sovereign green bonds: How will it impact NPS subscribers?

The Pension Fund Regulatory and Development Authority (PFRDA) will allow pension fund managers (PFMs) to invest in sovereign green bonds (SGrBs) once the Government of India (GoI) issues them in its bid to reduce the carbon intensity of the economy. The GoI is expected to issue SGrBs in the second half of the current financial year as part of the overall market borrowing programme. Currently, 10 PFMs manage funds under the National Pension System (NPS).

What are SGrBs? “As a part of the government’s overall market borrowings in 2022-23, Sovereign Green Bonds will be issued for mobilizing resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy,” according to a report on the framework for SGrBs of India issued by the Department of Economic Affairs, Ministry of Finance. The issuance of SGrBs will help GoI in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy, as per the report.

Abhijit Roy, CEO of GoldenPi, said, “The decision by the PFRDA to allow funds to invest in sovereign green bonds holds significant implications for retail investors or NPS subscribers. By including these environmentally conscious debt instruments in their investment portfolios, pension funds can achieve greater diversification, spreading risk across various asset classes and promoting sustainable investments aligned with environmental, social, and governance (ESG) principles. Retail investors, who are increasingly conscious of the environmental impact of their investments, can now align their pension contributions with their values, supporting projects that promote sustainability, renewable energy, and environmental protection.”

With SGrBs typically issued with longer maturities, they offer stability and long-term returns, making them suitable for retail investors' pension needs. The inclusion of these bonds in pension funds reflects the growing global trend of focusing on sustainable development and climate change mitigation, providing investors with opportunities to contribute to environmentally responsible initiatives.

Roy said, “The availability of SGrBs in pension funds can raise awareness among retail investors about sustainable investing, encouraging a more informed and socially responsible approach to financial decision-making. As retail investors venture into this space, they may benefit from reduced market volatility, as sovereign green bonds are considered relatively safe investments with government backing. Bonds issued in January have given returns of up to 7.10% for 5-Year SGrBs and 7.29% for 10-Year SGrBs, with the interest payout frequency Semi-Annual for both. If market conditions persist as is, we can expect to get similar or much better returns going ahead.”