Having standard definitions for what constitutes a green project will help unlock the full potential of green bonds

The Government of India’s move to issue green bonds of $80 billion and later almost the same amount of green sovereign bonds is an important initiative to curb climate change. As India faces mounting environmental and social challenges, innovative financing mechanisms have become essential in bridging the gap between sustainable development needs and capital availability.
Green bonds, along with impact investing and blended finance, are leading the charge in integrating Environmental, Social and Governance (ESG) factors into financial markets. These instruments not only mobilise capital for sustainability focused projects but also promote accountability, transparency and long-term environmental benefits. In India, green bonds have emerged as a key tool for financing projects that address the nation’s climate resilience, energy transition and biodiversity conservation goals.

A Growing Market

Green bonds are fixed-income instruments that raise capital specifically for projects with clear environmental benefits. In India, the market for green bonds has experienced rapid growth, driven by the country’s ambitious climate goals, including its commitment to achieving net-zero emissions by 2070. Indian corporations, financial institutions and government agencies are increasingly using green bonds to finance renewable energy projects, sustainable infrastructure and energy efficiency initiatives. India’s first green bond issuance came in 2015 when Yes Bank issued a Rs 1,000 crore bond to fund renewable energy projects. Since then, the market has expanded significantly.

India issued over $18 billion in green bonds by the end of 2022, making it one of the leading emerging markets in this space

According to the Climate Bonds Initiative (CBI), India issued over $18 billion in green bonds by the end of 2022, making it one of the leading emerging markets in this space. This growth reflects the increasing appetite among both domestic and international investors for sustainable investment opportunities in the country.

Renewable Energy

One of the primary sectors benefiting from green bond financing in India is renewable energy. With the country aiming to achieve 500 GW of renewable energy capacity by 2030, green bonds have played a pivotal role in mobilising the necessary funds. Solar and wind energy projects, in particular, have seen significant investments facilitated by green bonds. For instance, the Indian Renewable Energy Development Agency (IREDA) has issued green bonds to finance solar power projects across the country, contributing to India’s broader energy transition strategy. Additionally, private companies such as NTPC and Adani Green Energy have tapped into green bond markets to finance their renewable energy projects. These bonds not only help in reducing the cost of capital for such projects but also signal to investors that these companies are committed to sustainability goals.

Climate Resilience

Green bonds have been instrumental in financing sustainable infrastructure projects that enhance climate resilience. The State Bank of India has issued multiple green bonds to fund infrastructure projects focused on water management, waste management and energy-efficient buildings. These investments are crucial for a country like India, where rapid urbanisation and industrialisation have increased the vulnerability of cities to climate risks such as flooding, heatwaves and pollution. In 2020, the SBI raised $100 million through green bonds to fund sustainable projects across several States.

Overcoming Barriers

While green bonds have driven significant progress in India, certain challenges remain, particularly when it comes to financing projects in sectors deemed high-risk or less commercially viable. Blended finance, which combines concessional capital from public or philanthropic sources with private sector investment, has been instrumental in overcoming these barriers. By de-risking projects and attracting private capital, blended finance structures are expanding the scope of investments that can benefit from green bonds.

For example, the Government of India, through its National Investment and Infrastructure Fund (NIIF), has used blended finance to leverage private investments in sectors such as waste management and sustainable urban development. These sectors, while critical to India’s long-term sustainability, often struggle to attract private financing due to perceived risks. Blended finance has helped mitigate these risks and ensure that essential projects receive the funding they need to succeed.

A major hurdle is the lack of standardised definitions and criteria for what constitutes a ‘green’ project. This has led to concerns about greenwashing, where projects may be labelled as environmentally friendly without delivering significant benefits. Efforts are underway to address this through global frameworks such as the Green Bond Principles, which provide guidelines for ensuring the credibility of green bonds. The Securities and Exchange Board of India has also introduced regulations that mandate greater transparency and disclosure in the issuance of green bonds, helping build investor confidence.

Another challenge is the relatively high cost of issuing green bonds, particularly for smaller issuers. However, as the market matures and more institutional investors incorporate ESG factors into their investment decisions, the cost of issuing green bonds is expected to decrease. Additionally, international partnerships and financial institutions such as the World Bank and the Asian Development Bank are providing technical and financial support to help scale up green bond issuances in India.

Critical Role

Green bonds are playing a critical role in India’s journey toward sustainable development, providing much-needed capital for projects that address climate change, energy transition and climate resilience. By aligning financial returns with environmental outcomes, green bonds not only mobilise capital but also promote transparency and accountability in pursuit of sustainability. As India continues to implement its ambitious climate goals, the green bond market will be integral to financing the transition to a low-carbon, climate-resilient economy.

However, overcoming challenges such as standardisation and high issuance costs will be essential to unlocking the full potential of green bonds in India. Collaborative efforts between the government, private sector and international organisations will be key to scaling this market and achieving India’s sustainability objectives.

Authors: Prof. Barun Kumar Thakur, Faculty of Economics, FLAME University, Janardhana Anjanappa, CEO, Tyche Investments, & Prof. Sridhar Samant, Faculty, TISS.