The successful debut of India’s sovereign green bond is a landmark event for its emerging sustainable finance ecosystem. Issued in two tranches of $1 billion each, the rupee-denominated onshore debut was heavily oversubscribed at a six basis point lower yield than the average India sovereign bond in the first round, and four basis points lower in the second round.

This unexpected “greenium” marks an encouraging benchmark for future sustainable sovereign and corporate debt.

The greenium’s positive signalling effect is substantial. It was secured against two major odds: The headwinds due to sluggish global growth, rising global interest rates and downward pressure on the rupee, which offered suboptimal conditions for international investors to buy into a local-currency-denominated offering.

Second, the near absence of a domestic ESG-aligned investor base had raised scepticism about local investor appetite. The result shows that the market readiness for the green label exists and can be propelled with supportive regulatory/policy action. The greenium could become more sizeable with larger volumes of local currency sovereign green issuances both in onshore and offshore markets.

The strategic co-benefits of sovereign issuance are bigger than the gains made on an individual issuance. According to a BIS paper, “After (the inaugural) issue, the annual number of corporate issues tends to increase across jurisdictions.” This happens due to demonstration effects. A 2021 sovereign issuers’ survey carried out by the Climate Bonds Initiative, reported that diversification of the investor pool and creation of a local green bond market are major motivators for most sovereign issuers. This was not a stated aim of the Indian authorities, but the regulatory support extended to investors will help do just that and will pave the way for better incentive structures.

Transparency on the use of green bond resources for credible sustainable projects is vital. Budget 2023 carries the list of projects and expenditures which will be financed by the sovereign green borrowing. The Centre’s Green Finance Working Committee has done well to largely stick to the dark green categories of expenditures, in terms of volume, within those marked as ‘medium to dark green’ in the second party opinion (SPO) it received on its Green Bond framework. The allocations to MNRE (KUSUM, solar and wind power (grid scale), the National Green Hydrogen Mission), and the Ministry of Railways (three metro project lines and energy efficient electric locomotives) clearly fall in this category.

The MoEFCC (National Afforestation Programme) allocation comes under the light green category in the SPO, implying that its long-term effects on climate mitigation or resilience are unclear. The Ministry of Housing and Urban Affairs allocation for equity investment in metro projects stands out.

Investors care for integrity and adhering to the best norms on evaluation and selection of projects is important. To build on the success of the sovereign green bond in India’s G20 Presidency, here are two suggestions:

Foster a programme to grow local currency sovereign green issuances by emerging economies to avoid external debt traps and generate a larger pipeline of sustainable projects for national and global capital markets.

Define and label sustainable activities through interoperable frameworks/taxonomies to guide capital flows. Definitions that can work seamlessly for global and local investors will help identify credible project pipelines and expenditures.

The writer is Head, South Asia Programme, Climate Bonds Initiative