Sovereign Green Bonds - Red Signal On The Horizon?

The United States has elected climate change denier Donald Trump as president again. 

Trump, true to form, in one of his executive orders, has directed the US to withdraw from the landmark Paris climate change agreement on climate change cooperation. In a further setback to the aim to reduce carbon emissions, he has also promised to increase US oil and gas production. 

This development is set to trigger other moves that the Indian government and the Reserve Bank of India will be closely watching, as it has implications for the issuance of sovereign green bonds in India. 

Announced first in the Union Budget for 2022-23, the intent was that these bonds would help generate proceeds at a lower cost — popularly known as ‘greenium’. A greenium refers to the favourable pricing that is available to such bonds, where the funds raised are meant to be used specifically for sustainable projects. The investor agrees to a greenium on a bond because of the sustainable use of such funds, and generally, these green or climate bonds attract dedicated green or impact funds. 

Launched with a lot of noise and fanfare, the RBI issued green bonds worth 160 bln rupees in 2022-23 in two tranches. After the initial noise died down, the greenium declined to just 1 basis point over other government bonds of similar vintage. 

This prompted a lot of questioning of whether the government and RBI should be issuing such bonds, as most of the investors remained the same banks and institutions from within India, failing in the twin objective of attracting fresh investors and accessing cheaper capital. 

Another important aspect is that the government can use the proceeds of such bonds only for green projects, and thus entail higher costs for compliance and audit, to ensure transparency. 

As the government prepares its Union Budget for 2025-26 , there has to be a long hard look at whether sovereign green bond issuances are worth the effort and cost involved. The greeniums have vanished altogether in recent issuances. In May 2024, a green bond auction was cancelled, another issuance saw low demand and in November 2024, the bidding was at such a low level, that RBI was forced to devolve the issuance of a 10-year sovereign green bond. The RBI has course-corrected its green bond strategy and issued a 30-year bond, which attracted interest from domestic pension funds and insurance companies looking at long-term investment avenues. 

However, there is no sign of the dedicated green or climate investment pools that were originally envisaged. 

With Trump in the saddle in the US, many banks such as Citibank, Goldman Sachs, Wells Fargo, and Bank of America-Merrill Lynch have just exited the United Nations-backed Net Zero Climate Alliance. This is a further sign indicating a dent in the demand for such bonds, along with raising questions about the sustainability of issuing such bonds, which carry a higher compliance cost for the Indian government. 

While it may be premature to write off sovereign green bonds entirely, the government and RBI would be wise to avoid setting rigid sub-targets. Future issuances should be guided by market conditions, timing, and demand rather than self-imposed fundraising commitments. Recent moves, such as classifying these bonds as ‘specified securities’ under the Fully Accessible Route, are smart tweaks to boost demand. However, attracting fresh investor interest may require additional incentives.

Trump and the global political shift in climate change and climate finance initiatives will also have to be factored in. The issuance of sovereign green bonds carries a noble underlying philosophy, but there needs to be a rethink on whether the philosophy needs an update in a world where climate change is denied by the head of the world’s largest economy. 

It may be good to see the signals flashing red ahead and stop to take a step back to let the global and domestic environment settle down. 

After all, if there are no new takers for sovereign green bonds at a lower cost, then are such bonds even worth issuing?