Green bonds are specialized financial instruments that governments, corporations, and multilateral development banks issue to raise funds aimed at projects that mitigate climate change or promote environmental sustainability. They serve as a crucial tool in financing initiatives that contribute to cleaner air, reduced emissions, and enhanced climate resilience.
Issuers of green bonds often benefit from lower yields compared to traditional bonds. This allows them to allocate proceeds exclusively for green investments, effectively reducing their overall borrowing costs. The appeal of green bonds lies in their ability to attract responsible investors who are focused on sustainability.
Despite the advantages, India has faced challenges in garnering interest for its sovereign green bonds (SGrBs). Investor demand has been muted due to concerns regarding liquidity, limited participation from foreign investors, and the relatively small issue sizes. These factors restrict secondary market trading and deter potential investors.
The proceeds generated from SGrBs are directed towards various sectors, including:
Since the fiscal year 2022-23, India has successfully issued SGrBs eight times, raising approximately ₹53,000 crore. Looking ahead, the estimated funding requirement for the fiscal year 2024-25 was initially set at ₹32,061 crore but has been revised down to ₹25,298 crore due to high yield concerns raised by investors.
The primary challenges hindering the growth of green bonds in India include:
To enhance participation in green bonds, a World Bank report recommends issuing sustainability bonds that merge green and social projects. This approach could attract a broader range of investors. Additionally, enhancing transparency post-issuance can significantly boost investor confidence.
Liquidity remains a significant concern for green bonds. The limited market size, fewer active traders, and the tendency for investors to hold bonds until maturity curtail secondary market activity, which in turn diminishes the overall appeal of these bonds.
Globally, greenium levels— the premium for green bonds over conventional bonds—reach 7-8 basis points. In contrast, India's green bonds offer a lower premium of only 2-3 basis points, rendering them less appealing to potential investors.
“Finance is a tool to shape the future; the challenge is to ensure it serves sustainability and growth together.”
Q1. What are green bonds?
Answer: Green bonds are debt instruments designed to raise funds for projects that aim to reduce emissions or enhance climate resilience. They are issued by various entities including governments and corporations.
Q2. How do green bonds benefit issuers?
Answer: Issuers of green bonds typically offer lower yields than conventional bonds, ensuring that the proceeds are directed solely to green investments, thereby reducing overall borrowing costs.
Q3. Why has India struggled to attract investors for its sovereign green bonds (SGrBs)?
Answer: India’s SGrBs have encountered low investor demand due to concerns about liquidity, limited foreign interest, and small issue sizes that hinder trading in the secondary market.
Q4. What sectors in India benefit from green bonds?
Answer: Proceeds from SGrBs support sectors like energy-efficient locomotives, metro projects, renewable energy initiatives, and afforestation programs, contributing to sustainable development.
Q5. How can India improve green bond participation?
Answer: India can enhance participation by issuing sustainability bonds that integrate green and social projects and by improving transparency following issuance to build investor trust.
Question 1: What is the primary purpose of green bonds?
A) To raise funds for conventional energy projects
B) To finance projects that enhance climate resilience
C) To attract foreign investments
D) To support traditional infrastructure projects
Correct Answer: B
Question 2: What is a significant challenge for India's green bonds?
A) High demand from investors
B) Limited liquidity in the market
C) Excessive yields offered
D) Too many active traders
Correct Answer: B
Question 3: What sectors are funded by Indian green bonds?
A) Social housing
B) Renewable energy projects
C) Mining operations
D) Conventional manufacturing
Correct Answer: B
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