Sovereign Green Bonds in India

News: Sovereign Green Bonds (SGrBs) are in the news because India has struggled to generate strong investor demand for them despite their potential to fund the country’s green transition.

About Green Bonds

• Green bonds are debt instruments issued by governments, corporations, or multilateral banks to raise capital for projects that reduce emissions or enhance climate resilience (e.g., solar farms, electric mobility, afforestation).
• These bonds typically offer lower yields (interest rates) than conventional bonds, allowing issuers to raise funds at a lower cost (greenium).
• Investors in green bonds are usually long-term, impact-focused investors looking for stable returns and compliance with green financing mandates.

About Sovereign Green Bonds (SGrBs)

• SGrBs are green bonds issued by sovereign entities, such as the Government of India, to fund large-scale sustainability projects.
• India’s SGrB framework, established in 2022, defines “green projects” as initiatives that:
  • Enhance energy efficiency
  • Reduce carbon emissions
  • Promote climate resilience
  • Improve natural ecosystems

Why is Investor Demand Weak?

1. Low Greenium (Cost Savings) in India: Globally, green bonds enjoy a greenium of 7-8 basis points, making them attractive for issuers. In India, the greenium is only 2-3 basis points, offering little cost advantage over conventional bonds.
2. Liquidity Constraints: Small issue sizes and investors holding bonds until maturity reduce secondary market trading, making them less attractive.
3. Lack of Impact Investment Ecosystem: India has a limited ecosystem of social impact funds and responsible investing mandates, which are key drivers of green bond demand in advanced markets.
4. Delayed Transparency & Reporting: Investors rely on post-issuance allocation and impact reports to assess the effectiveness of funds. India has not yet published the 2023-24 allocation report, leading to investor uncertainty.

Potential Solutions to Boost Demand

1. Combining green and social projects in bond offerings (as seen in other emerging markets) could attract wider investor interest.
2. Improving Transparency & Reporting
   • Faster publication of allocation and impact reports can enhance investor trust.
   • Clearer data can help investors screen SGrBs for inclusion in their portfolios.
3. Enhancing Liquidity: Increasing issue sizes and promoting active secondary market trading can make SGrBs more appealing.
4. Strengthening Green Finance Ecosystem: Encouraging social impact funds and responsible investment mandates can boost demand for green bonds.
5. Multilateral Bank Partnerships: Partnering with global development banks (e.g., World Bank) to enhance credit ratings can help attract foreign investors.