Green bonds

Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

A green bond is a loan raised by selling bonds, where the money must be set aside for climate- and environment-friendly projects, such as solar power, clean transport or energy efficiency.

It is a labelled bond: a bond whose money can only go to a stated purpose. Green bonds matter because they bring savings from bond markets into India's shift to low-carbon growth. They also give investors a way to check that their money is really used for green projects.

Explanation

How a green bond works

• The basic bond is ordinary.
• The issuer pays a fixed interest at set times. This interest is called the coupon.

• It pays back the principal (the original amount) on the maturity date.

• The only new rule is where the money goes. This is called the "use of proceeds".

• The money can go only to eligible green projects, such as renewable energy, clean transport or energy efficiency.

• The issuer must track the money and report how it was spent.

• An outside check builds trust.

• An independent external reviewer or a Second Party Opinion provider (an outside expert who checks the green framework) confirms that the bond meets green criteria.
• Global standards such as the ICMA Green Bond Principles set out what a "green" bond should look like.

Greenium: the price of being green

• Greenium = the small discount in yield that investors accept on a green bond compared with a similar ordinary bond.

• Yield means the return an investor actually earns on the price they paid.

• Formula: Greenium = Yield on ordinary bond − Yield on green bond

• Why investors accept less:
• Some funds have to hold green assets, so demand for green bonds rises.

• More demand → higher bond price → lower yield. (Bond prices and yields move in opposite directions.)

• Worked example:

• A 10-year G-sec yields 7.30%. A 10-year sovereign green bond yields 7.25%.
• Greenium = 7.30 − 7.25 = 0.05%, which is 5 basis points. One basis point is 0.01%.
• On ₹8,000 crore, the government saves 0.05% × ₹8,000 crore = ₹4 crore a year in interest.

Types of issuers

• Corporate green bonds: issued by companies and banks. The first Indian green bond was issued by Yes Bank in 2015.
• Sovereign green bonds (SGrBs): issued by the Government of India as part of its normal market borrowing.
• Municipal green bonds: issued by urban local bodies (ULBs), which are city governments such as municipal corporations. Ghaziabad issued the first green municipal bond in 2021.

The main risk: greenwashing

• Greenwashing = a bond is sold as "green", but the money does not really go to green projects.
• Why it matters:
• Investors accept a lower yield because they trust the green label.

• If the label is false, that trust breaks and the green bond market shrinks.

• The fix is independent review, reporting on how the money was used, and penalties for false claims.

In India

• SEBI (the capital market regulator) framework for corporate green bonds:
• 2017: SEBI issued a circular setting disclosure rules for issuing and listing green debt securities [4].
• 6 February 2023: SEBI revised these disclosure rules [4].
  • The issuer must appoint an independent external reviewer. The reviewer checks that the bond meets green criteria and that the money reaches eligible projects [4].
  • The issuer must report how it used the money, how it chose projects and what environmental impact followed [4].
  • The revision widened coverage to blue bonds (water and ocean projects) and yellow bonds (solar energy) [4].
• February 2023: SEBI issued a list of dos and don'ts to prevent greenwashing [5].

• November 2022: SEBI allowed municipalities to issue green debt securities under the ILDM Regulations 2015 (the rules for issue and listing of municipal debt securities) [6].

• Sovereign green bonds (SGrBs):

• The Union Budget 2022-23 announced SGrBs [3].
• The Sovereign Green Bonds Framework was issued on 9 November 2022 [1].
• The money goes to public sector projects that reduce the carbon intensity of the economy (emissions per unit of GDP) [1][2].
• CICERO, a Norway-based Second Party Opinion provider, rated the framework "Medium Green" with a "Good" governance score. It found the framework in line with the ICMA Green Bond Principles [1].
• First issue: January–February 2023, for ₹16,000 crore in 2022-23 [2].
• 2024-25: the government raised ₹21,697.40 crore through SGrBs [3].
• Excluded uses: fossil fuels and nuclear power, among others.

Don't confuse with

• Sustainability-linked bond: a green bond's money is tied to specific green projects. A sustainability-linked bond's money is not tied to projects. Instead its coupon changes if the issuer misses targets such as emission cuts. SEBI regulates it under the separate ESG debt framework of 5 June 2025 [7].
• Blue bond / yellow bond: these are narrower labels. A blue bond funds ocean, water and marine projects. A yellow bond funds solar energy. Both were brought under SEBI's green debt rules in 2023 [4].
• Social bond and sustainability bond: a social bond funds social results such as affordable housing or healthcare. A sustainability bond funds a mix of green and social projects. Both come under the 2025 ESG framework, not the green bond rules [7].
• Sovereign green bond vs ordinary G-sec: both are government borrowing. The difference is that SGrB money is earmarked for green public projects, and it usually carries a slightly lower yield (the greenium).

Prelims Hooks

• First Indian green bond: Yes Bank, 2015. First green municipal bond: Ghaziabad, 2021.
• Sovereign Green Bonds Framework: 9 November 2022. CICERO rated it "Medium Green" with a "Good" governance score [1]. First issue was ₹16,000 crore in 2022-23 [2].
• Nuclear power is excluded from SGrB funding, along with fossil fuels. This is a common trap, because nuclear power is low-carbon.
• Greenium = the lower yield investors accept on green bonds. If a G-sec yields 7.30% and an SGrB yields 7.25%, the greenium is 5 basis points.
• SEBI 6 February 2023 revision: requires an independent external reviewer and adds blue (water/ocean) and yellow (solar) bonds [4].
• Trap: SEBI's 5 June 2025 ESG framework covers ESG debt securities other than green bonds, meaning social, sustainability and sustainability-linked bonds [7].

Mains Points

• Credibility is the core issue. Green finance only works if investors trust the label.
• SGrBs (₹16,000 crore in 2022-23; ₹21,697.40 crore in 2024-25 [2][3]) show the state setting an example.
• SEBI's external review and anti-greenwashing rules [4][5] protect that trust.

• But India needs stronger checks on how projects actually perform. Otherwise greenwashing can weaken the whole market.

• The cost benefit is small, and the list of eligible projects is narrow.

• The greenium is only a few basis points, so the saving on interest is modest.

• Leaving out nuclear power shrinks the pool of eligible projects, even though nuclear power is a low-carbon source. This is a trade-off between global green standards and India's energy needs.

• Green bonds can widen the sources of climate finance.

• Corporate and municipal green bonds [6] reduce the burden on banks, which borrow short-term but would otherwise have to lend long-term for infrastructure.
• They also draw private and household savings into renewable energy and urban climate projects. This links GS-III themes (infrastructure, environment) with GS-II fiscal federalism, since cities need better own revenues to borrow.

Related concepts

• Corporate bond
• Debenture
• Convertible bond
• Foreign Currency Convertible Bond
• Masala bonds
• Foreign bonds
• Perpetual bond
• AT1 bonds
• Sovereign green bonds
• Blue bonds

Read more

• Corporate, offshore and thematic bonds