Green bonds are a type of debt instrument issued by governments, corporations, and multilateral institutions to raise funds for projects aimed at reducing carbon emissions and enhancing climate resilience. The primary appeal of these bonds lies in their ability to provide lower borrowing costs, commonly referred to as the greenium—a premium that enables issuers to secure funds at more favourable rates than traditional bonds.
Investors in green bonds typically seek stable, long-term returns and often have specific mandates to allocate a portion of their portfolio to environmentally sustainable investments. Despite these advantages, green bonds still represent a relatively small fraction of global debt markets, and their growth hinges on improved reporting practices and investor incentives.
In 2022, the Indian government introduced a framework for issuing sovereign green bonds (SGrBs) to support the country’s transition towards a low-carbon economy. Under this framework, green projects include those aimed at improving energy efficiency, promoting climate resilience, and preserving ecosystems.
Since the launch of SGrBs in the 2022-23 financial year, India has issued these bonds eight times, raising nearly ₹53,000 crore. The proceeds have primarily funded the production of energy-efficient electric locomotives, metro rail projects, renewable energy initiatives, and afforestation under the National Mission for a Green India.
For 2024-25, the revised budget allocations for SGrB-funded projects include:
Despite the potential benefits of SGrBs, India has struggled to generate strong investor interest, limiting the ability to secure a meaningful greenium. While global green bond markets see greeniums in the range of 7–8 basis points, Indian SGrBs often achieve just 2–3 basis points, making them a less attractive funding option.
A major hurdle is liquidity. Small issue sizes and the tendency of investors to hold these bonds until maturity have stifled secondary market trading, reducing their appeal. Furthermore, India lacks a strong ecosystem of social impact funds and responsible investment mandates that would otherwise drive demand for green bonds.
Even efforts to ease rules for foreign investors have not led to significant improvements, with auctions witnessing limited participation and a portion of these bonds devolving to primary dealers.
The lower-than-expected demand for SGrBs has had tangible consequences. The government’s initial funding requirement from these bonds for 2024-25 stood at ₹32,061 crore. However, due to investor reluctance and higher yield expectations, the revised estimate has now been lowered to ₹25,298 crore.
This shortfall has forced the government to scale back allocations for critical green projects. Notably, funding for grid-scale solar initiatives has been slashed from ₹10,000 crore to just ₹1,300 crore, highlighting the challenge of relying solely on SGrBs to finance India’s green transition.
Addressing the limitations of SGrBs requires a multi-pronged approach. According to a recent World Bank report, emerging market sovereign issuers tend to favour a blend of green and social projects in their bond structures rather than exclusively issuing green bonds.
In this context, India could consider issuing sustainability bonds, which combine green projects with social impact initiatives. Such an approach may attract a broader base of investors, particularly those with a dual focus on environmental and social development goals.
Additionally, enhancing market liquidity through larger issue sizes, improving transparency in reporting green project outcomes, and developing a stronger ecosystem for responsible investing could significantly bolster demand.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.
Published on: Feb 21, 2025, 2:52 PM IST
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