In News:

India’s sovereign green bond (SGrB) market is gaining traction as strong investor demand has resulted in a persistent “greenium”—green bonds trading at lower yields than comparable conventional Government Securities (G-Secs).

• Average greenium in H1 FY2026–27 reached its highest level since India began issuing SGrBs in FY2022–23.
• This suggests stronger market absorption capacity for green bond issuances in the second half of FY2026–27.

What is Greenium?

• Greenium = Green Premium.
• It refers to the lower yield investors accept on green bonds compared with conventional bonds of similar maturity/credit quality.
• Since bond prices and yields move inversely, lower yield indicates higher investor willingness to pay for green bonds.
• Reflects growing preference for environmentally sustainable investments.

Sovereign Green Bonds (SGrBs)

• Government debt instruments introduced in Union Budget 2022–23 to finance India’s transition towards a low-carbon economy.
• Proceeds are earmarked for eligible green projects.
• India’s SGrB Framework (2022) is aligned with ICMA Green Bond Principles, 2021.
• The framework was assessed by CICERO (Norway) and rated “Medium Green” with “Good Governance.”
• SGrBs:
  • Issued through uniform-price auctions.
  • Eligible for repo transactions.
  • Tradable in the secondary market.
  • Eligible for Statutory Liquidity Ratio (SLR) purposes.

Management of SGrB Proceeds

• Proceeds are deposited into the Consolidated Fund of India.
• Managed by the Public Debt Management Cell, Ministry of Finance, through mechanisms such as the Green Register.
• Green Finance Working Committee (GFWC), chaired by the Chief Economic Adviser, is involved in project selection/evaluation.
• Allocation and utilisation are audited by the CAG.

Current Market Trends

• India has about ?877 billion of sovereign green bonds outstanding.
• 30-year green bonds have emerged as the dominant segment, with outstanding issuance exceeding ?500 billion.
• Earlier issuances faced weak demand at yields acceptable to the government, but demand has strengthened, particularly for longer-maturity bonds.

Why is Demand Rising?

• Insurers: Need long-term assets to match long-term liabilities.
• Infrastructure classification: Green bonds are treated as infrastructure investments, providing greater investment flexibility to insurers.
• ALM requirements: Long-duration green bonds fit the Asset-Liability Management requirements of insurers and pension funds.

Why is Greenium Important?

• Lower borrowing cost: Can reduce the government's cost of financing climate-related investments.
• Climate finance: Supports renewable energy, clean mobility and climate-adaptation projects.
• Market maturity: A stable greenium indicates sustained investor confidence in India's green-finance ecosystem.
• Supports India's Net Zero target by 2070.

Sustainable Finance Instruments

Why is it in the News?

Recently, the RBI approved FIIs such as insurance companies, pension funds, and sovereign wealth funds to invest in India's Sovereign Green Bonds (SGrBs), which finance projects aiming to advance India's shift to a low-carbon economy.

What are Green Bonds?

• Green bonds are bonds issued by any sovereign entity, inter-governmental groups or alliances, and corporates with the aim that the proceeds of the bonds are utilised for projects classified as environmentally sustainable.
• The framework for the sovereign green bond was issued by the government on November 9, 2022.

Why are these bonds important?

• Over the last few years, Green Bonds have emerged as an important financial instrument to deal with the threats of climate change and related challenges.
• According to the International Finance Corporation (IFC), a World Bank Group’s institution, climate change threatens communities and economies, and it poses risks to agriculture, food, and water supplies.
• A lot of financing is needed to address these challenges.
• It’s critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development – and Green Bonds are a way to make that connection.

When did Govt plan these bonds?

• In August 2022, the government said it stands committed to reducing the Emissions Intensity of GDP by 45 percent from the 2005 level by 2030 and achieving about 50 percent cumulative electric power installed capacity from non-fossil fuel-based energy resources by the same year.
• In line with the commitment to significantly reduce the carbon intensity of the economy, the Union Budget 2022-23 announced to issue of Sovereign Green Bonds.
• The country’s climate actions have so far been largely financed from domestic resources and it is now targeting the generation of additional global financial resources.
• The issuance of the Sovereign Green Bonds will help the Indian government in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy.

Where will the proceeds go?

• The government will use the proceeds raised from SGrBs to finance or refinance expenditure (in parts or whole) for various green projects, including renewable energy, clean transportation, energy efficiency, climate change adaptation, sustainable water and waste management, pollution and prevention control, and green buildings.
• In renewable energy, investments will be made in solar, wind, biomass, and hydropower energy projects.