Green Bonds: Financing the Sustainable Future of India

Green bonds have emerged as a game-changing financial instrument for funding projects related to environmental challenges. Born from sustainable finance, these bonds present a means of channeling investment towards environmentally friendly initiatives. India, one of the fastest-growing large economies in the world, has embraced green bonds in its quest to advance energy transition and climate goals.

What is a Green Bond?

Green bonds are a form of debt instrument, the proceeds of which are exclusively used to raise funds for projects that are environmental and climate-related. These projects usually pertain to renewable energy, energy efficiency, sustainable transport, and other initiatives that align with sustainability goals.

Growth of Green Bonds in India

India has been one of the rapidly developing green bond markets, both from the government and the private sector:

Sovereign Green Bonds: In early 2023, India entered the market with its sovereign green bonds, raising INR 16,000 crores in two tranches of approximately $2 billion. These bonds of tenor five and ten years were oversubscribed more than four times, indicating an excellent demand for the same. The proceeds were allocated to renewable energy, metro projects, and green hydrogen initiatives. Interestingly, these bonds attracted both domestic insurers and international investors and set a benchmark for future issuances.

The region also sees state-led initiatives such as the plans of Maharashtra to issue green bonds for local projects on sustainability. Large public sector entities and private companies also continue to enter the green bond market, diversifying their sources of funding in support of the green transition.

International Participation: The green bonds in India have also received significant attention among international investors, which is testimony to the appeal they hold in the international market. India is working frenetically to achieve its ambitious renewable energy targets of 500 GW by 2030.
Success Stories in India

India’s green bond market has caused some tangible benefits:

• Renewable Energy Expansion: The large-scale solar and wind energy parks have been a result of investment facilitated by green bonds. In this respect, it has financed various solar parks and wind farms; hence, it contributed to developing 174 GW of renewable energy in the country until the year 2024.
• Sustainable Transport: It has financed the expansion of metro rail networks in several cities like Delhi and Bengaluru, hence decreasing carbon emissions and enhancing urban mobility.
• Green Hydrogen Mission: Green hydrogen production has also seen a fair share of investments, while green bonds have invested in the decarbonization of industries such as steel and ammonia production.

Successful Green Bond Projects in India

• Renewable Energy Expansion: The GoI sovereign green bonds have contributed to the expansion of solar and wind capacity in the country. A portion of the proceeds, for instance, will be utilized to create the Green Hydrogen Mission, in order to make India a global hub for green hydrogen production.
• Sustainable Urban Infrastructure: Municipal corporations, such as Pune and Hyderabad, have raised funds by issuing green bonds for projects involving greening urban infrastructure. The projects cover initiatives for energy-efficient street lighting, public transportation, and sustainable projects.
• Corporate Green Bonds: NTPC and Greenko have been two of the corporate bond issuers for financing renewable energy projects. A case in point is NTPC raising considerable capital to add solar and wind energy to its portfolio​.

Top-Performing Green Bonds in India

• Sovereign Green Bonds: These bonds, issued for the first time by the Indian government in 2023, attracted frenetic investor interest with a concession or “greenium” of six basis points. They may indicate how sovereign issuances can set a benchmark for market growth.
• State-Level Green Bonds: The Maharashtra government announced plans to raise $650 million through green bonds in order to finance sustainable initiatives at the state level-a first in the entry of states into the green financing channel.
• Corporate Bonds: Similarly,REC Limited and Power Finance Corporation too have issued green bonds for renewable energy projects. They received an overwhelming response from the international investor community because of their strong framework and transparency​.

Challenges and Opportunities

While green bonds hold immense promise, several challenges persist:

• Greenwashing Risk: The authenticity of deployment of funds for green projects remains very important. India introduced both pre- and post-issuance audits for greater transparency and to inspire investor confidence.
• Domestic Market Growth: Most of the green bond action in India is currently focused on international markets. The domestic market can be further opened by supportive regulations, such as tax incentives and pension fund mandates.
• Higher Interest Rates: Green bonds must have attractive yields relative to conventional bonds to attract a wider investor audience. This is particularly true for retail investors who are looking for yield.
  The Way Forward

The green bond journey of India has shown that it is possible to scale up sustainable finance. This could be followed by:

• Sovereign Issuances: More frequent green bond issuances by the government would provide a stable market, instill confidence among investors, and make compliance easier.
• Stronger Frameworks: Better regulation of green bonds, such as project eligibility criteria, will enhance integrity and lead to greater investor participation.
  International cooperation with global markets: The G20 presidency can help India achieve the goal of international cooperation on green finance and make more countries include green bonds in the financing tool.

Green bonds have been a critical instrument in aligning economic growth with sustainability performance for India. By addressing the challenges and fostering innovation, they can also play a catalyzing role in financing a green and resilient future of the nation and the world.