In an era where financial systems are being reoriented to meet climate goals, green bonds have emerged as key instruments to fund the transition towards a low carbon economy. While developed economies have led the charge in green bond issuance, India has emerged as a significant player, positioning herself as a climate conscious economy with ambitious clean energy and emission goals.

India’s green bond market gathered momentum after Yes Bank pioneered the first rupee-denominated green infrastructure bond in February 2015. In the decade since, India has witnessed a steady uptick in both private and public sector green bond issuances.

The next major milestone for the Indian green debt market was the launch of Sovereign Green Bonds (SGrBs), with the government issuing ₹16,000 crore ($1.94 billion) to fund public sector green infrastructure in FY 2022-23.

In FY 2023-24, the government further issued SGrB worth ₹20,000 crore in four tranches. The National Highways Authority of India has also announced issuance of green bonds worth ₹1,000 crore for implementation of environment friendly measures on Delhi-Mumbai Expressway project.

According to the SEBI, the current outstanding green debt securities (excluding SGrB) amounts to ₹6,953 crore. In India, majority of green bonds finance projects in renewable energy, clean transport, sustainable water management, and green buildings.

Need to scale up

Yet, India accounts for merely 2.2 per cent of global green bond issuances and the domestic green bond market remains modest in the context of India’s climate finance needs which is estimated at $10 trillion by 2070 to achieve net-zero GHG emission.

While India’s progress is commendable, a glance at global trends shows there’s room to scale. The global green bond market capitalisation has reached $2.9 trillion, with Europe, US, and advanced economies leading the way in green debt market development and regulations.

To illustrate, the European Union has developed a comprehensive green taxonomy and mandatory disclosures under the Sustainable Finance Disclosure Regulation, ensuring investor confidence and curbing greenwashing.

Nearer home, China’s dual tiered system offering both domestic and foreign green bond frameworks have enabled it to become the world’s largest green bond issuer in the Global South.

The challenges

Despite its potential, India’s green bond market faces structural and operational challenges. On the supply side, there is a limited pipeline of shovel-ready green projects, especially at the state, district, and municipal levels, mainly due to lack of technical capacity to structure bankable green bond offerings.

On the demand side, investors often perceive green bonds as less attractive due to an unclear risk-return profile, lack of fiscal incentives, and high cost of issuance of green bonds. To exemplify, the government initially failed to raise funds through the SGrB auction in 2024 as bond investors were reluctant to accept lower yield on green bonds.

The comparatively lower yield, also known as “Greenium,” is a globally accepted norm where investors typically accept a lower return on green bonds due to their ecofriendly deployment. Institutional investors are dissuaded from investing due to operational hurdles in fund deployment, delays in project approvals and inadequate reporting on environmental impact.

Until recently, the lack of a standardised green classification led to inconsistent disclosures, and in some cases accusations of greenwashing. However, the recently released draft Climate Finance Taxonomy when aligned with the Sovereign Green Bond Framework is expected to standardise definitions, streamline disclosure requirements, discourage greenwashing, and enhance tracking of fund flows.

To deepen and mainstream the green debt financing market, India must adopt a multi-pronged strategy.

First, institutional mechanisms need strengthening. This includes establishment of a nodal agency for ensuring inter-ministerial alignment, capacity building and coordinating project pipelines. States and urban local bodies should also be empowered through technical assistance and fiscal incentives to issue their own green bonds.

Second, transparency and accountability must be ensured. India should develop sector-specific impact measurement frameworks and mandate third party monitoring and audits of green bond proceeds. Such evaluations must be published in a timely manner for investors and public to avoid ambiguity. To boost institutional investment, a third party “green guarantor” should be set up to guarantee green projects and de-risk investments in green bonds. A green guarantor will be responsible for raising awareness in market, certifying issuers’ credibility, and penalising issuers for missing their green objectives.

Third, tax incentives for green bond investors can catalyse greater participation from the financial sector. For instance, exempting tax on investment, redemption and LTCG (if held for five years) spiked the demand for Sovereign Gold Bond among retail investors in India.

Fourth, India may consider replicating the German twin bond mechanism where the German government issues a green bond replicating and linking it to a conventional government security. Both bonds bear the same maturity segment, coupon rate, interest rate, and maturity date. Investors of German Green Bonds can swap their holdings with the conventional German government bond at any time. This helps in building a full green yield curve alongside the conventional yield curve. This further portrays the potential of the greenium.

As India charts its path towards a $10-trillion economy, embedding sustainability into its financial DNA is both an imperative and an opportunity. With the right policy push and stakeholder collaboration, India can not only transform into a green economy but also emerge as an influential player in the global sustainable finance architecture.

The writer is Co-founder & Partner, Policy Consensus Centre. Views expressed are personal

Published on June 10, 2025