In January 2023, India sold its first-ever sovereign green bonds, raising a sum of $1 billion in the process. The nation’s initial sale of green bonds came on the heels of the Finance Minister, Ms Nirmala Sitharaman’s Budget 2022-23 announcement of the government’s intention to issue Sovereign Green Bonds with the aim of reducing carbon emissions and ensuring climate resilience.

The Reserve Bank of India had declared that green bonds for the fiscal year would be issued in two tranches of INR 8000 crore each in January 2023 and February 2023. In its inaugural auction in January 2023, two green bonds worth INR 4000 crores each, one with a 5-year tenure and one with a 10-year tenure, were released.

Like most green bonds, the two bonds issued by the central bank attracted a green premium of six-basis pointsthe 5-year bond was priced at 7.10 percent, and the 10-year bond was priced at 7.29 percent. Green premium or‘greenium’ is the negative difference in yields between green and non-green bonds with the same financial characteristics and auctioned by the same issuer. It is essentially the higher price that investors pay for a bond with a sustainable label.

The first tranche of green bonds issued by the government was oversubscribed by more than four times. The funds raised from the bond issue are expected to be used for public sector projects that are energy efficient and help in improving natural ecosystems and biodiversity. Solar, wind, green irrigation pumps and metro rail projects are expected to be beneficiaries of proceeds from the bond. Given the increasing interest in green investment across the globe, the issue of the country’s first sovereign green bond is expected to help India open a new path to reach its Sustainable Development Goals through green financing.

Green bonds: Origin and history

In 2022, a total of $863.4 billion was issued under the green, social and sustainability-linked umbrella in the bond market. This represents 5 percent of the global bond market. Additionally, green bonds account for over half of these bond issues at $487.1 billion. In spite of its popularity today, the first investment in green bonds took place hardly 15 years back when the European Investment Bank issued its Climate Awareness Bond in 2007. It was during this time that the United Nations' Intergovernmental Panel for Climate Change (IPCC) also published its assessment report on the impact of climate change, which showed the close link between human action and global warming.

In 2008, the World Bank issued its first green bond for a group of Swedish pension funds that wished to invest in climate-focused projects. This was the first bond issue that defined project eligibility for green bonds and enabled a second-party opinion. A second-party opinion is the independent expert evaluation of a green bond's framework against the following four core principles of the International Capital Market Association:

i)    Use of proceeds,
ii)   Project evaluation and selection,
iii)  Management of proceeds, and
iv)  Reporting.