An Explainer on Green Bonds

The Indore Municipal Corporation (‘IMC’) recently made headlines for issuing India’s first municipal ‘green bonds’ to the public. But what are these ‘green bonds’ that the IMC issued and what is special about these bonds? 

‘Green bonds’ are a tool to raise funds for new and existing projects that focus on environmental benefits and a more sustainable economy. The word ‘green’ represents the concepts of renewable energy, sustainable resource use, conservation, clean transportation and solutions to climate change. The International Capital Markets Association (“ICMA”), defines “green bond” hereinunder as :-

any type of instrument where the proceeds or an equivalent amount will be exclusively applied to finance, or re-finance, in part or in full, new and/or existing eligible green projects.”

This is not the first time a ‘green bond’ has been issued in India. In 2015, Yes Bank successfully issued the nation\’s first-ever green infrastructure bonds, raising INR 1,000 crores in total. The money obtained is being utilised by YES Bank to finance renewable energy infrastructure projects, such as modest hydropower, solar, wind, and biomass projects, etc. However, a more formalized approach to ‘green bonds’ was adopted, in September 2022, when the RBI had announced that it was working with the government to develop a framework for the issuing “Sovereign Green Bonds”. 

In line with this, the Department of Economic Affairs (‘DEA’) released the finalised draft ‘Framework for Sovereign Green Bonds’ (‘the Framework’). The objective behind introducing the framework is to increase the government’s over-all market borrowing plan for 2022-23, to finance public sector green infrastructure projects. The “green bonds” are eco-investment tools, intended to help the Indian economy reduce its carbon intensity in line with its commitment to decarbonize by 2030.

What Does the Framework Day?

Under the Framework, only the Government of India (‘GOI’) will have the authority to issue Green Bonds. The framework is designed to be applied to all ‘sovereign green bonds’ issued by the GOI. The payment of principals and interests on the issuance of the “green bonds” will not be conditional on the performance of the ‘eligible projects’. In other words, the investment itself will be sufficient for harvesting returns regardless of the project’s performance. The framework has been made as per the guidelines of ICMA, Green Bond Principles (2021) and under this scheme, the investors will not bear any project related risks 

What is Meant by a ‘Green Project’?

A ‘green project’ under the framework is defined as one which encourages energy efficiency in resource utilization, reduces carbon emissions and greenhouse gases, promotes climate resilience and/or adaptation, values and improves natural ecosystems and biodiversity especially in accordance with Sustainable Development Goal principles. The government has identified and compiled a list of ‘eligible green projects’ to fund from the proceeds raised by issuance of green bonds. The list has been categorised based on sectoral areas and project-wise scope for development within them, along with the environmental objective it seeks to fulfil. The areas in which the green bonds are proposed to be issued are:-

  1. Renewable Energy 
  2. Energy Efficiency 
  3. Clean Transportation 
  4. Climate Change Adaptation 
  5. Sustainable Water and Waste Management 
  6. Pollution Prevention Control 
  7. Green Buildings
  8. Sustainable Management of Living Natural Resources and Land Use
  9. Terrestrial and Aquatic Biodiversity Conservation  

How Will the Mechanism Work?

The expenditure carried out by the government will include money taken from the public in the form of investment, subsidies, grants-in-aid, or tax incentives (in a combination of all or some of these). The expenditures will be limited to expenditures that occurred maximum 12 months prior to issuance of the green bonds.  

The government has put a time-period in place to endeavour that all the proceeds get allocated to projects within 24 months following issuance. Any expenditure already financed and/or refinanced by dedicated source/ other Government agency will be excluded to ensure suitable oversight and avoid double-counting. The release of funds will be in instalments and will be linked to the target-based achievements of the project in question. 

Will there be any Projects that will Not be Financed by Green Bonds?

Yes, projects dealing with fossil fuels, waste-incineration, alcohol, weapons, tobacco, gaming, or palm oil industries, forest biomass, landfill and hydropower plants (larger than 25 MW) will be excluded from this scheme. 

Who will Oversee the Projects Financed by Green Bonds?

The Ministry of Finance (‘MoF’) has set up a “Green Finance Working Committee” (‘the Committee’) to monitor projects financed by green bonds. The Committee is proposed to be headed by the Chief Economic Adviser (‘CEA’) and will comprise of members from the Ministry of Environment, Forests and Climate Change (‘MoEFCC’), Niti Aayog, Budget Division of DEA and Infrastructure Finance Secretariat, DEA.

The Committee can also onboard members as per its requirements. To ensure that projects selected fulfil the intended objectives, the Committee may also consult other ministries and sectoral experts while making decisions. The Framework envisions, the Committee to meet at least twice a year, to help the MoF inter-alia, to ‘select and evaluate projects under the framework’. 

What Process will be Followed to Select the ‘Green Project’?

At the initial stage, the concerned Ministry/Department will be responsible for evaluation of the project in consultation with experts. The projects selected must fall under one or more of the eligible project categories under this Framework on basis of which an initial evaluation report will be prepared by the concerned Ministry/Department and submitted to the Committee. The Committee will then review and approve projects for funding from proceeds raised out of issuing green bonds, a process also known as “green funding”. 

The Committee is responsible for ensuring that the review and allocation of proceeds is completed within 24 months from the date of issuance. However, if any project is postponed, or cancelled, it is mandatory to replace it with another eligible green project. The objective of this effort will bring in easy replaceability in case of ineligibility, or delays in execution and/or possible cancellations of projects.

An annual report will be prepared on the allocation of proceeds to the eligible projects which will contain a description of the projects financed, their status of implementation, as well as the unallocated proceeds. This report will be brought out under supervision of the Committee. The Committee also has an obligation to separately assess and report the impact of projects that help reduce carbon intensity and provide environmental benefits. 

How will the Proceeds Received from the Green Bonds be Managed?

The proceeds collected from the green bonds will be deposited in the Consolidated Fund of India (‘CFI’). From the CFI funds will be disbursed to the eligible green project. To ensure that the allocation of proceeds is transparent, clear and beyond doubt, a separate account will be created and maintained by the MoF. 

The Public Debt Management Cell (‘PDMC’) will monitor the allocation of funds towards eligible green expenditures and also keep a track of proceeds for debt management purposes. In case there are any unallocated proceeds, the same will be carried forward to successive years for investment in eligible green projects only. Such carried forward proceeds are required to be allocated to the eligible projects within a span of two years from the date of issuance.

The MoF has a duty to maintain a dedicated information system right from the issuance of the green bonds to the impact of the eligible green project. In order to secure this objective, the framework proposes maintaining a “Green Register” for including the details of the green bond issuance, proceeds generated, allocations made to eligible projects including information about the eligible projects (summary of the project details, allocation of proceeds to each project, expected climate impact and the extent of unallocated proceeds, both aggregate as well as project-wise). An amount at least equal to the net proceeds from the completed issuances under this Framework will be allocated to the financing and/or refinancing of expenditures that meet the eligibility criteria.

How is Accountability Regarding the Utilisation of Funds Proposed to be Ensured?

To ensure transparency regarding the allocation and utilisation of proceeds for funding the green projects, the government proposes to make an ‘Allocation Report’. This report is proposed to be updated every 12 months until the proceeds are fully allocated. If any material changes are required, the same is proposed to be carried out under the supervision of the Committee. The preparation and coordination of this Report is the responsibility of the DEA. The allocation and utilization of Green Bonds will be subjected to audit by the Comptroller and Auditor General (‘CAG’). 


Prima facie, this policy appears positive for sustainable financing. Issuing such bonds will help India’s commitment to meeting its Nationally Determined Contributions (NDC) goals. This is turn will also increase India’s standing in the global green finance sector. The transparent disclosure standards, reporting systems, and specified screening criteria of green projects, is likely to see continuous investor interests due to India\’s goal of lowering emissions by 2030 and reaching net-zero emissions by 2070. However, the good intent behind this policy is not sufficient, the successful implementation and measurable results is what will test the mettle of ‘green bonds’.

About Ushashi Datta

Ushashi is a lawyer, an avid reader, and policy enthusiast. Her love for policy bloomed during her time as a LAMP Fellow. She's passionate about social justice and using her law degree to make a difference. When she's not reading or advocating for change, you can find her cooking
experimentally or listening to true crime podcasts.

Ushashi Datta

Ushashi is a lawyer, an avid reader, and policy enthusiast. Her love for policy bloomed during her time as a LAMP Fellow. She's passionate about social justice and using her law degree to make a difference. When she's not reading or advocating for change, you can find her cooking experimentally or listening to true crime podcasts.

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