Green bonds are innovative financial instruments designed to raise capital specifically for projects that yield environmental benefits. These bonds play a crucial role in enabling governments and various institutions to finance endeavors related to clean energy, sustainable transportation, and climate resilience. By offering a way to attract investors interested in sustainability, green bonds contribute significantly to the global movement towards sustainable development.
India initiated its sovereign green bond program in FY23 to support its ambitious net-zero emission target set for 2070. The funds generated from these bonds are directed towards financing initiatives such as renewable energy projects, energy-efficient transportation systems, and afforestation efforts.
From the nearly ₹58,000 crore raised between FY23 and FY25, approximately ₹14,330 crore has been earmarked for metro rail projects. Additionally, the railway ministry is expected to receive ₹31,070 crore to enhance energy-efficient electric locomotives.
Green bond proceeds have been significantly allocated to metro rail and energy-efficient railway projects as part of broader efforts to cut emissions and improve urban connectivity. This allocation aligns with India's strategic goals for sustainable transportation.
Numerous renewable energy projects have been funded through green bonds, including:
The Indian government has set a target to issue ₹58,000 crore in sovereign green bonds by FY25, with an additional ₹25,342 crore planned for FY26.
Although developed markets often experience a 'greenium'—higher returns for green bonds—India's green bond yield difference compared to conventional bonds has remained limited to 2-3 basis points. This indicates a relatively lower level of investor interest in the Indian green bond market.
There are signs suggesting that the government may be considering a transition towards conventional securities and other debt instruments for financing green projects. This shift is attributed to the observation that green bonds have not substantially outperformed traditional bonds in terms of returns.
Green bonds represent a vital tool for India to finance sustainable infrastructure, mitigate carbon emissions, and facilitate a transition towards a low-carbon economy. However, the long-term success of green bonds is contingent on market responses and the confidence of investors.
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