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Sovereign Green Bond initiative promotes sustainable investments, funding clean energy and eco-projects. Sovereign Green Bond enhances green financing strategy by aligning with global climate goals.
Sovereign Green Bond is a specialized financial instrument that governments issue to raise funds exclusively for environmental and climate-friendly projects. Unlike regular bonds, the proceeds from these bonds are reserved for green projects such as renewable energy, clean transportation, and sustainable agriculture. In February 2022, the Indian Finance Minister announced India’s plan to issue Sovereign Green Bonds to fund green infrastructure, marking a significant step in India’s commitment to sustainable development.
| Sovereign Green Bond Overview | |
| Aspect | Details |
| Definition | A debt instrument issued by a government to fund environmentally sustainable projects. |
| First Issued | Announced in Union Budget 2022; First issued in FY 2022-23. |
| Objective | To finance public sector green projects and reduce carbon intensity. |
| Issuer | Government of India (via RBI auctions). |
| Framework Compliance | Aligned with International Capital Market Association (ICMA) Green Bond Principles 2021. |
| Key Projects Funded | Electric locomotives, metro projects, renewable energy, afforestation. |
| Difference from Standard Bonds | Proceeds are exclusively allocated to climate-friendly projects, unlike standard bonds used for general expenditures. |
| Greenium (Yield Discount) | Low (2-3 basis points) compared to the global average (7-8 basis points). |
| Challenges | Low investor demand, lack of liquidity, and minimal greenium. |
| Future Prospects | Enhancing green finance ecosystem, boosting liquidity, and exploring alternative sustainable bonds. |
A Sovereign Green Bond is a debt instrument issued by the government to finance projects that contribute positively to the environment. These projects may include renewable energy generation, pollution control, sustainable water management, and biodiversity conservation.
Unlike traditional bonds, which can fund any project, Sovereign Green Bonds are strictly allocated to environmentally friendly initiatives that contribute to climate resilience, reduce carbon footprints, and promote sustainable development.
In the Union Budget 2022, the Finance Minister announced India’s plan to issue Sovereign Green Bonds as part of the government’s borrowing program for FY 2023. The funds raised through these bonds would be directed toward public sector projects that promote clean energy and sustainable infrastructure.
India issued its first Sovereign Green Bonds in January 2023, raising ₹16,000 crore through two tranches of ₹8,000 crore each. These bonds were issued with a maturity of 5 and 10 years and were well received by investors. The framework for these bonds aligns with the International Capital Market Association’s (ICMA) Green Bond Principles, ensuring transparency and credibility in the allocation of funds.
The introduction of Sovereign Green Bonds is expected to bring multiple economic and environmental benefits. Below are some major impacts:
India has set an ambitious target to achieve 500 GW of non-fossil fuel-based capacity by 2030 and net-zero emissions by 2070. Sovereign Green Bonds provide much-needed capital to accelerate projects in:
By aligning with international green financing norms, India’s Sovereign Green Bonds attract foreign institutional investors (FIIs) and non-resident investors.
The Sovereign Green Bond scheme helps India transition to a low-carbon economy by financing:
The Sovereign Green Bond scheme comes with distinct features that set it apart from traditional government bonds:
Since the launch of the Sovereign Green Bond scheme, the Indian government has issued these bonds multiple times, raising a total of ₹53,000 crore. Approximately 50% of the funds have been allocated to Indian Railways for energy-efficient electric locomotives. Other allocations include:
Despite these initiatives, investor demand has been lower than expected. In some auctions, a significant portion of green bonds remained unsold, highlighting the need for better incentives and investor confidence-building measures.
In a current discussion, the Secretary of the Department of Economic Affairs highlighted that in the past 2.5 years, the issuance of Sovereign Green Bonds has been lower than expected. This is mainly due to investors being hesitant to accept lower yields compared to global benchmarks.
For example, in August 2024, only ₹1,697 crore worth of bonds were taken up, whereas the government had aimed for ₹6,000 crore. Additionally, the projected funding from Sovereign Green Bond proceeds for 2024-25 was revised downward from ₹32,061 crore to ₹25,298 crore, affecting allocations for grid-scale solar projects.
Despite the positive outlook, Sovereign Green Bonds in India face several challenges:
Indian Sovereign Green Bonds have witnessed muted investor interest. In multiple auctions, significant portions of the bonds remained unsold due to lower-than-expected demand.
A greenium is the extra premium investors are willing to pay for green bonds over standard bonds. In India, the greenium for Sovereign Green Bonds is only 2-3 basis points, whereas globally, it averages 7-8 basis points.
Most investors hold Sovereign Green Bonds until maturity, making them illiquid in the secondary market. This limits their attractiveness compared to traditional bonds.
To maintain investor confidence, India must strengthen green bond regulations and ensure transparency in reporting to prevent greenwashing—where bonds falsely claim environmental benefits.
To enhance the success of Sovereign Green Bonds, India can learn from other countries:
The EU has issued over €100 billion in Sovereign Green Bonds, offering strong investor incentives and robust environmental impact reporting.
The U.S. green bond market is dominated by municipal green bonds, funding clean energy, water conservation, and sustainable buildings.
China has developed a well-regulated green bond market, ensuring transparent fund allocation and impact measurement.
To enhance investor confidence, India should:
To make Sovereign Green Bonds a more effective tool for green financing, India can implement the following strategies:
India can introduce Sustainability Bonds, which combine green financing with social impact projects like affordable housing and healthcare.
Timely and transparent allocation and impact reports are crucial to increasing investor trust.
Encouraging secondary market trading of green bonds can attract more investors.
Tax incentives and policy support can boost domestic and international investment in green bonds.
The Sovereign Green Bond initiative is a vital step in India’s journey towards a low-carbon economy. While the scheme has successfully raised funds for green projects, challenges such as low demand and liquidity issues need to be addressed. By improving transparency, offering better incentives, and exploring sustainability bonds, India can strengthen its green finance market and achieve its long-term environmental goals.
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