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Sovereign Green Bonds in India: Issues and Challenges
Context:
India introduced Sovereign Green Bonds SGrBs in 2022 to support its transition to a low-carbon economy. Despite expectations, demand for SGrBs remains weak, impacting the financing of key green projects.
India’s Sovereign Green Bond Framework
- Announced in the Union Budget 2022-23.
- The Reserve Bank of India (RBI) began issuing these bonds in 2023.
What are Green Bonds?
- Sovereign Green Bonds (SGrBs) are debt instruments issued by governments to finance environmentally sustainable projects
- Green bonds are issued by sovereign entities, corporations, and multilateral institutions to raise capital for projects that contribute to emission reduction and climate resilience.
- These bonds typically offer a lower yield than conventional bonds, a phenomenon called the Green Premium (Greenium).
- The funds raised are allocated exclusively for renewable energy, clean transportation, energy efficiency, and sustainable infrastructure.
designed to comply with the International Capital Market Association (ICMA) Green Bond Principles (2021).
- The four core components include:
- Use of Proceeds: Funds must be allocated to green projects.
- Project Evaluation & Selection: Clear criteria for eligible projects.
- Management of Proceeds: Transparent allocation and tracking.
- Reporting: Regular updates on fund utilisation and impact.
Performance of India’s Sovereign Green Bonds
- Since 2022-23, India has issued SGrBs eight times, raising approximately ₹53,000 crore.
- A significant portion of proceeds is used for energy-efficient three-phase electric locomotives.
- 2024-25 Allocations:
- ₹12,600 crore for electric locomotives.
- ₹8,000 crore for metro projects.
- ₹4,607 crore for renewable energy projects, including Green Hydrogen Mission.
- ₹124 crore for afforestation under the National Mission for a Green India.
Challenges in Green Bond Market in India
- Weak Investor Demand
- Low participation in auctions and devolvement to primary dealers.
- Greenium in India remains low (2-3 basis points) compared to global levels (7-8 basis points).
- Liquidity Constraints
- Small issue sizes and lack of secondary market trading limit attractiveness.
- Investors prefer to hold bonds till maturity, reducing market circulation.
- Lack of Social Impact Funds
- Unlike developed markets, India lacks a strong ecosystem of responsible investing mandates.
- Greenwashing Concerns
- Investors worry about misallocation of funds, seeking greater transparency in fund utilisation and impact assessment.
- Regulatory and Compliance Issues
- Adhering to both domestic and international green finance standards poses difficulties.
- Delayed post-issuance allocation reports reduce investor confidence.
Impact of Weak Demand for Sovereign Green Bonds
- Inability to raise adequate funds impacts key green infrastructure projects.
- Planned allocations revised downward:
- Grid-scale solar project funding cut from ₹10,000 crore to ₹1,300 crore.
- To bridge the shortfall, the government relies on general revenue, diverting resources from other sectors.
Way Forward
- Enhancing Liquidity and Secondary Market Trading
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- Encouraging active trading of green bonds in the secondary market.
- Increasing issue sizes to attract institutional investors.
- Expanding Green Finance Mechanisms
- Exploring Sustainability Bonds, which combine green and social projects, to attract a wider investor base.
- Strengthening Transparency and Reporting
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- Timely publication of allocation and impact reports to improve investor trust.
- Clearer project selection and monitoring mechanisms.
- Attracting International Investors
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- Multilateral Development Banks (MDBs) could back Indian green bonds to enhance their credit profile.
- Designating SGrBs under the Fully Accessible Route (FAR) for non-resident investors.
Conclusion
Sovereign Green Bonds play a crucial role in financing India’s climate goals and Nationally Determined Contributions (NDCs) under the Paris Agreement. Enhancing demand requires addressing liquidity constraints, regulatory challenges, and investor confidence. Strengthening India’s green finance market through innovative financing mechanisms, transparency, and global collaboration can accelerate sustainable development.
