Sovereign green bonds

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

Meaning

A sovereign green bond (SGrB) is a green bond that the Government of India itself issues as part of its normal market borrowing. The money it raises must go only to public sector projects that lower the carbon intensity of the economy, meaning the emissions produced for each unit of GDP [1][2].

Why it matters:

• It lets the government borrow for climate action at a slightly cheaper rate.
• Because the government is the issuer, it also sets a reference point (a "benchmark") that other Indian green bonds are priced and judged against.

Formula: Greenium = Yield on an ordinary G-sec − Yield on an SGrB of the same maturity

Explanation

How an SGrB works

• Bond basics. A bond is a loan written down as a paper that can be traded.
• The borrower pays a fixed interest at set times. This interest is called the coupon.

• At maturity (the end date), the borrower returns the principal, the original amount.

• G-sec (government security) means a bond issued by the government. An SGrB is a G-sec with a "green" label added.

• It forms part of the government's regular market borrowing. It is not extra borrowing on top of that [1][2].

• The RBI is the government's debt manager. It auctions SGrBs the same way it auctions other G-secs.

• Ring-fencing. The money raised is linked only to eligible green public projects, such as renewable energy, clean transport and energy efficiency.

• Second Party Opinion (SPO). An outside expert checks whether the green framework is genuine. For India, this expert was CICERO, a provider based in Norway [1].

What is allowed and what is excluded

• Allowed: public sector projects that reduce emissions or improve the environment, in line with the ICMA Green Bond Principles. ICMA (International Capital Market Association) publishes the global voluntary standard for green bonds [1].
• Excluded: fossil fuels and nuclear power, among others.
• Exam trap: nuclear power produces little carbon, but it is still not eligible under India's SGrB framework.

Greenium: why green bonds are cheaper to issue

• Greenium is the small cut in yield that investors accept on a green bond compared with an ordinary G-sec of the same maturity.
• Why investors accept it: many funds must hold green assets or want to, so demand for green bonds is higher.

• Chain: more demand for green bonds → their price goes up → their yield goes down → the government pays less interest.

• Bond prices and yields move in opposite directions.

• For a bond that pays ₹100 a year for ever: at a 5% market rate its price is ₹100 ÷ 0.05 = ₹2,000. At 10%, the price falls to ₹1,000.

• So a higher price, driven by green demand, means a lower yield. That lower yield is the greenium.

• Worked example:

• A 10-year G-sec yields 7.30%. A 10-year SGrB 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 of borrowing, 0.05% saves the government ₹4 crore a year in interest.

• What makes the greenium larger or smaller:

• Larger when many ESG and climate funds (funds that invest by environmental, social and governance standards) are looking for green assets, and when the framework is seen as credible.
• Smaller when few green bonds are traded, which makes them harder to sell, or when investors doubt how the money is used.

Why credibility matters

• Greenwashing means calling a bond "green" when its money does not really go to green projects.
• An independent SPO rating and reports on how the money was used build investor trust. That trust is what keeps the greenium alive.

In India

• Announcement: Union Budget 2022-23 announced SGrBs [3].
• Framework: approved by the Union Finance Minister and issued on 9 November 2022 [1].
• Outside review: CICERO rated India's framework "Medium Green" with a "Good" governance score, and found it in line with the ICMA Green Bond Principles [1].
• First issue: ₹16,000 crore in 2022-23, raised in January–February 2023, in the second half of that year [2].
• Latest figure: in 2024-25 the government raised ₹21,697.40 crore through SGrBs [3].
• Purpose: public sector projects that lower the carbon intensity of the Indian economy [1][2].
• Wider green bond system in India (for context):
• First Indian green bond: Yes Bank, 2015 (a corporate issue, not sovereign).
• SEBI's rules for green debt securities date from 2017 and were revised on 6 February 2023. The revision requires an independent external reviewer and reports on how the money was used [4]. These rules are meant for corporate and other market issuers.
• SEBI's dos and don'ts to prevent greenwashing were issued in February 2023 [5].

Don't confuse with

• Corporate green bond: a company issues it (first in India: Yes Bank, 2015), under SEBI's green debt rules [4]. An SGrB is issued by the Government of India as part of its own market borrowing.
• Ordinary G-sec: its money goes into the general government budget for any use. An SGrB is also a G-sec, but its money is tied to eligible green public projects, and it usually pays a slightly lower yield (the greenium).
• Sustainability-linked bond: its money is not tied to specific projects. Instead, the coupon changes if the issuer misses targets such as emission cuts [8]. An SGrB is the opposite: its money goes to specific projects and its coupon is fixed.
• Green municipal bond: issued by an urban local body such as a city corporation (first: Ghaziabad, 2021), under SEBI's ILDM Regulations 2015 [6]. An SGrB is issued by the Centre.

Prelims Hooks

• Sovereign Green Bonds Framework was issued on 9 November 2022, after being announced in Union Budget 2022-23 [1][3].
• CICERO (Norway), the Second Party Opinion provider, rated the framework "Medium Green" with a "Good" governance score, in line with the ICMA Green Bond Principles [1].
• First issue: ₹16,000 crore in 2022-23 [2]. 2024-25: ₹21,697.40 crore [3].
• Trap: nuclear power and fossil fuels are excluded from SGrB funding, even though nuclear power is low-carbon.
• Greenium = G-sec yield − green bond yield. Example: 7.30% − 7.25% = 5 basis points.
• Trap: SGrB money goes to projects that cut carbon intensity (emissions per unit of GDP), not total emissions in absolute terms [1][2].

Mains Points

• Green finance and fiscal cost: SGrBs (₹16,000 crore in 2022-23; ₹21,697.40 crore in 2024-25 [2][3]) let the government fund climate projects at a slightly lower cost. They also create a benchmark yield curve (a line of yields across different maturities) that helps price private green bonds. But the greenium is small, so the saving to the budget is limited. The bigger gains are credibility and wider access to climate-focused investors.
• Credibility vs scope: an outside SPO rating [1], along with SEBI's external review and anti-greenwashing rules for market issuers [4][5], builds trust. However, leaving out nuclear power narrows the pool of eligible projects. A "Medium Green" rating also shows there is room to make the framework stronger. Both points link to India's energy transition debate in GS-III.
• Link to wider bond-market reform: a working sovereign green curve can help deepen India's shallow corporate bond market, which is about 16% of GDP (2025) [7]. Companies and cities can price their own green debt against it. This reduces the burden on banks, which otherwise carry long-term infrastructure risk.

Related concepts

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

Read more

• Corporate, offshore and thematic bonds