Centre may shift to conventional securities for green financing, moving away from green bonds

While, many developed markets achieve a greenium – or green premium – of 3-8 basis points over conventional bonds in India, this has been limited to just 2 to 3 bps at most, the first person mentioned above said. One basis point is a hundredth of a percentage point.

Greenium is the difference between the yield or the return investors receive on a green bond and that from a similar conventional bond. 

It's the amount by which the yield on the green bond is lower due to investors' willingness to accept lower returns in exchange for the perceived benefits of investing in a green instrument.

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Green bonds have found takers in advanced economies like Germany, the European Union, China and Singapore, where the greenium has been 3-8 bps due to robust policy support, clear regulatory mandates, and, in some cases, tax incentives.

“If green bonds don’t prove effective in the next few years, the government will continue investing in green initiatives but won’t necessarily raise funds under the green bond label and use the conventional (government securities) route (for raising funds) for green investments," the person mentioned above said, requesting anonymity.

“A call may be taken after studying the performance of green bonds next year."

Amid environmental concerns

Amid growing concerns over climate change and environmental challenges, the central government introduced an annual target for raising green bonds starting in FY23, incorporating it into the annual budget.

Green bonds, a type of fixed-income investment, are used to finance projects with positive environmental impacts.

Over the past three years, the central government, through the Reserve Bank of India (RBI), has issued about ₹58,000 crore in sovereign green bonds, with an additional ₹25,342 crore earmarked for FY26.

This includes ₹16,000 crore in FY23, ₹20,000 crore in FY24, and an expected ₹21,697 crore in FY25.

Also read |  Centre's plan to raise ₹20,000 cr via green bonds is conditional on greenium

The central government has proposed ₹25,342.31 crore to finance eligible projects through green bonds in FY26, though the final issuance amount is to be announced separately.

The Economic Times reported on Tuesday that the government has reduced its FY25 target for financing projects through green bond proceeds by 27% from the budget estimate and plans to maintain this level next fiscal due to weak investor demand.

"The green bond was introduced amid discussions about investors willing to accept a set yield, provided the funds were directed exclusively toward green investments, following global best practices. However, it hasn't found much demand in the market," the second person mentioned above said.

"It will still be given some time to see if the market develops and whether investor interest strengthens," the person added, requesting anonymity.

Lagging uptake

Interestingly, during the ongoing fiscal, FY25, of the allocated ₹21,697 crore to be raised from green bonds, only ₹16,697.398 crore has been raised till January 2025 with another ₹ 5,000 crore expected to be raised in February, according to the RBI data.

The centre had in May 2024 rejected a ₹6,000 crore issue of green bonds, while it accepted only ₹1697.398 crores of the ₹6,000 crore bond issue it planned in August.

"Unlike developed markets where ESG-dedicated funds and mandated allocations drive sustainable finance, India lacks a structured investment ecosystem exclusively for green assets. Major economies benefit from institutional investors with ESG mandates, regulatory incentives, and tax benefits, fostering a deeper green bond market," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

Also read |  Centre likely to issue green bonds worth over ₹25,000 crore in FY25

In India, despite the government’s push for green finance, the absence of dedicated green investment vehicles has stunted the greenium with sovereign green bond auctions seeing weak demand, especially for the 10-year tenor, with investors preferring more liquid conventional G-Secs, Srinivasan said.

"The benchmark 10-year G-Sec typically has an aggregate outstanding issuance of ₹1.5-2 trillion per ISIN, ensuring strong secondary market depth, whereas the 10-year sovereign green bond issuance lacks market depth with limited issuance which is significantly curbing liquidity and price discovery. This illiquidity has deterred investors from paying a premium for green bonds," he added.

ISIN (International Securities Identification Number) is a global ISO standard used for the unique identification of financial instruments, including equities, debt, derivatives, and indices.

Spokespersons of the Ministry of Finance and the Reserve Bank of India (RBI) didn't respond to emailed queries.